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I want to move money between Vanguard mutual funds, say take all my money out of a Large-cap index fund and put it in a Small-cap index fund for simplicity sake. Is this a taxable event?

I know it is taxable if I'm transferring between fund families (say between a Vanguard fund and Fidelity fund) because it's essentially selling the fund, and buying another one. However, is it still taxable if it's just an exchange within the same fund family?

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    Two questions: what is your jurisdiction, and are the funds held within some special tax-deferred account? Jul 27, 2017 at 15:22
  • Before answering those two questions, it is still easy to suggest that selling your fund and exchanging for another is a taxable event as long as you are not holding the funds in a special tax-deferred account, like a 401k or RRSP. Tax law doesn't work on "similarities" like that in any jurisdiction I'm aware of; if you sell asset A, you get taxed on the gain within asset A, regardless of what you buy with the proceeds - even if you buy asset A immediately after! [note that some laws exist in most countries to prevent manipulation of this fact]. Jul 27, 2017 at 15:24
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    @Grade'Eh'Bacon: The US has 1031 like-kind exchanges: if you trade one asset for another which is sufficiently similar, it may not be a taxable event. But I don't think large-cap and small-cap would be sufficiently similar for this purpose. Jul 27, 2017 at 15:35
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    From the link: " Section 1031 does not apply to exchanges of: * Inventory or stock in trade * Stocks, bonds, or notes * Other securities or debt * Partnership interests * Certificates of trust"
    – D Stanley
    Jul 27, 2017 at 15:45
  • @Grade'Eh'Bacon, there are jurisdictions where something like that exists. In Russia, for example, you can move your money from one fund to another without paying taxes, as long as both funds are managed by the same company/bank. But I'm pretty sure there are other jurisdictions where it works similarly.
    – vladich
    Aug 17, 2018 at 23:09

2 Answers 2

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Contrary to what you might have heard, moving money between mutual funds, whether or not in the same family of funds, is a taxable event, assuming, of course, that the funds are not in tax-deferred retirement accounts. About the only thing that is not taxable is moving funds between share classes in the same mutual fund, e.g. a conversion from what Vanguard refers to as Investor Shares to Admiral Shares in the same fund. In some cases, the Admiral Shares may have a considerably different price (for example, Vanguard Health Care Fund Investor Shares (VGHCX) and Admiral Shares (VGHAX) are priced at $215.83 and $91.04 respectively and so changing from one class to the other changes the number of shares owned considerably while the net value of the investment remains unchanged.

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You are still selling one investment and buying another - the fact that they are managed by the same company should be irrelevant. So yes, it would get the same tax treatment as if they were managed by different companies.

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