How do Fund-to-ETF conversions affect tax lots?

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oneleaf
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How do Fund-to-ETF conversions affect tax lots?

Post by oneleaf » Sun Oct 22, 2017 4:22 pm

I am considering doing some conversions from Vanguard index funds to ETF's in my taxable account and curious how this would affect my SpecID tax lots.

If done right, then all of these lots will have partial shares.

Partial shares cannot be sold unless you liquidate an entire position. So, say, I have an ETF with the following tax lots.
1/15/2017: 780.250 shares.
2/15/2017: 52.500 shares

What happens if I sell 780 shares from the 1/15 lot? Will I have .250 shares leftover, or will it liquidate with the rest of the lot? If I wanted to get rid of the .250 shares, would I then sell 1 share, and take the remaining .750 shares from a different lot?

Curious for those who have done this, whether this creates a hassle with tax lots. Thanks!

Chip
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Re: How do Fund-to-ETF conversions affect tax lots?

Post by Chip » Mon Oct 23, 2017 5:30 am

I'm not sure how it works at Vanguard. At Fidelity if I sell "all" of a position, my account history will first show the whole number of shares sold. At settlement the fractional share will "sell" at the same price as the whole shares. This happens automatically and is considered one transaction for tax purposes.

I have never tried to sell only the whole number of shares; I always use the "sell all" option.

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grabiner
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Re: How do Fund-to-ETF conversions affect tax lots?

Post by grabiner » Mon Oct 23, 2017 5:28 pm

If you use specific identification, Vanguard won't let you sell a partial lot unless you liquidate your entire position. For example, if you have three lots of .8, .7, and .6 shares, you probably won't be able to sell one share, but you can sell two shares and Vanguard will take care of the extra tenth. I have two fractional ETF lots that are the result of this type of transaction; I converted the mutual fund to an ETF, and then donated all of two lots to charity, but I couldn't donate the fraction.

If you use first-in-first-out our highest-in-first-out, I don't know whether Vanguard takes whole shares or a whole lot. Thus, in your example, if you sell 781 shares first-in-first-out, it would make sense to take the entire old lot and 0.75 shares from the new lot; if you sell 53 shares highest-in-first-out (and the new lot has the higher basis), it would make sense to take the entire new lot and 0.5 shares from the old lot.
David Grabiner

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oneleaf
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Re: How do Fund-to-ETF conversions affect tax lots?

Post by oneleaf » Tue Oct 24, 2017 5:04 pm

grabiner wrote:
Mon Oct 23, 2017 5:28 pm
If you use specific identification, Vanguard won't let you sell a partial lot unless you liquidate your entire position. For example, if you have three lots of .8, .7, and .6 shares, you probably won't be able to sell one share, but you can sell two shares and Vanguard will take care of the extra tenth. I have two fractional ETF lots that are the result of this type of transaction; I converted the mutual fund to an ETF, and then donated all of two lots to charity, but I couldn't donate the fraction.

If you use first-in-first-out our highest-in-first-out, I don't know whether Vanguard takes whole shares or a whole lot. Thus, in your example, if you sell 781 shares first-in-first-out, it would make sense to take the entire old lot and 0.75 shares from the new lot; if you sell 53 shares highest-in-first-out (and the new lot has the higher basis), it would make sense to take the entire new lot and 0.5 shares from the old lot.
Thanks for sharing your experience.

Normally, I wouldn't care so much about how this is handled, but I have heard some issues with Vanguard messing up with SpecID, that I am afraid that ETF conversions complicate things further. But it sounds like they have this process under control, albeit with a few caveats. I still would be surprised if you can't sell 1 share with the tax lots you mentioned: .8, .7, .6. For instance, take .8 from one lot and .2 from another.

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Re: How do Fund-to-ETF conversions affect tax lots?

Post by triceratop » Mon Nov 13, 2017 10:05 pm

oneleaf wrote:
Tue Oct 24, 2017 5:04 pm
grabiner wrote:
Mon Oct 23, 2017 5:28 pm
If you use specific identification, Vanguard won't let you sell a partial lot unless you liquidate your entire position. For example, if you have three lots of .8, .7, and .6 shares, you probably won't be able to sell one share, but you can sell two shares and Vanguard will take care of the extra tenth. I have two fractional ETF lots that are the result of this type of transaction; I converted the mutual fund to an ETF, and then donated all of two lots to charity, but I couldn't donate the fraction.

If you use first-in-first-out our highest-in-first-out, I don't know whether Vanguard takes whole shares or a whole lot. Thus, in your example, if you sell 781 shares first-in-first-out, it would make sense to take the entire old lot and 0.75 shares from the new lot; if you sell 53 shares highest-in-first-out (and the new lot has the higher basis), it would make sense to take the entire new lot and 0.5 shares from the old lot.
Thanks for sharing your experience.

Normally, I wouldn't care so much about how this is handled, but I have heard some issues with Vanguard messing up with SpecID, that I am afraid that ETF conversions complicate things further. But it sounds like they have this process under control, albeit with a few caveats. I still would be surprised if you can't sell 1 share with the tax lots you mentioned: .8, .7, .6. For instance, take .8 from one lot and .2 from another.
Did you end up finding out any more information about this? I recently received some communication from Vanguard about some VTI shares I converted from VTSAX back in late 2016. I subsequently moved my assets to Merrill Edge in 2017 and of course liquidation of fractional shares occurred. This most recent Vanguard document was received 10+ months after I closed my Vanguard account and was simply an update on cost basis information. I assume Merrill got a duplicate copy and updated their records.

All looked perfectly fine before this recent kerfuffle, but after this recent change i see some tax lots showing:

Date shares Unit cost
9/21/2016 1 3.40
6/13/2016 1 51.27

The corresponding gains on those lots are of course massive: 3800% and 159%, and to my mind clearly flawed. I'm a bit at a loss how to correct the tax lot information (Merrill Edge has a form to do so, I just need to determine the correct information). Forunately I anticipated this so I screenshotted my Vanguard cost basis information before transferring to Merrill; I simply need to figure it out.

Could it have something to do with this? (warning: from 2007, before covered shares)
JDCPAEsq wrote:
Sun May 13, 2007 4:23 pm
The procedure I have always seen followed by tax practitioners, is to use a zero basis for the sale of fractional shares. I don't have time at the moment to cite authority for this, but I'm sure the practice is accepted by the IRS, and it certainly is easier than trying to allocate basis to fractional shares.
John
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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