Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

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Kookaburra
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Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Kookaburra »

Here's the skinny:

I would like to convert all of my shares of VIGAX to its ETF equivalent VUG. I purchased shares as far back as 2006 and as recent as last year; in other words, I have many lots of both non-covered and covered shares. I have SpecID selected as the cost basis.

The covered lots are shown individually. For the non-covered shares, since brokerages aren't required to report cost basis, the "Cost Basis" view on my Vanguard account only shows a single row which aggregates all of the non-covered lots. It shows the total # of lots, the total cost basis, etc.
In the past, I have sold some non-covered lots as part of tax-loss harvesting, and I have records on my end as to which lots those were. So I've been applying specific identification even though Vanguard doesn't know, care, or report that on a 1099 (since they don't know which lots I selected). As a result, the aggregation of all non-covered shares on Vanguard's website (which naturally defaults to average cost since they don't know which lots I selected to sell in the past) results in a different current total cost basis than my records. No big deal (I think).

But here's where it gets dicey, and where I get confused...

When attempting to convert all shares to the ETF equivalent VUG, the rep at Vanguard told me in the prepared verbal statement that: "non-covered shares will carry over to the ETF as average cost and this is locked and uneditable. The covered shares carry over with the set basis method and individual lots will be listed and locked."

Does anyone know what this means exactly? The rep couldn't explain it any further than the prepared statement.

My interpretation and concern is that this could permanently transmutate my non-covered shares to average cost basis and report as such on 1099 if/when I sell shares, which I don't want (for the reasons described above, i.e., that I have a history of lot sales with SpecID, and wish to continue hand-picking lots whenever I sell). Is that the case? Or, does this simply mean that all non-covered shares will convert over to ETF as a group, the system will continue to display them in aggregate and thus shows the average basis by default (just as it does now, and for the same reason), but that I can still sell individual lots of the non-covered ETF as long as I keep track on my end?

Note: surprisingly, they will not allow me to only convert the covered shares and leave the non-convered shares in the mutual fund. This would have been a nice work-around.

I ended up not converting while I seek clarity on this topic.

For those who have converted both covered and non-covered mutual fund shares to ETF, and had been using SpecID all along, can you help me understand what this means if I were to proceed?
nalor511
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by nalor511 »

These are questions for Vanguard.
Topic Author
Kookaburra
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Kookaburra »

nalor511 wrote: Tue Jan 24, 2023 11:06 pm These are questions for Vanguard.
I asked. The rep couldn’t explain it further than the prepared statement.
nalor511
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by nalor511 »

Kookaburra wrote: Tue Jan 24, 2023 11:19 pm
nalor511 wrote: Tue Jan 24, 2023 11:06 pm These are questions for Vanguard.
I asked. The rep couldn’t explain it further than the prepared statement.
I would kick it up the chain until you can get it answered. If you can't, then decide how impactful this is to you, and make your decision whether or not to do it
Topic Author
Kookaburra
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Kookaburra »

nalor511 wrote: Tue Jan 24, 2023 11:22 pm
Kookaburra wrote: Tue Jan 24, 2023 11:19 pm
nalor511 wrote: Tue Jan 24, 2023 11:06 pm These are questions for Vanguard.
I asked. The rep couldn’t explain it further than the prepared statement.
I would kick it up the chain until you can get it answered. If you can't, then decide how impactful this is to you, and make your decision whether or not to do it
Or, I can ask here for others that have been in this position and converted, to ensure I get the “real deal” scoop. Surely, I’m not the only person who bought mutual funds before Jan. 2012 and wanted to convert to ETF.
nalor511
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by nalor511 »

Sorry, I only converted covered shares (many times). Best of luck
exodusNH
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by exodusNH »

Kookaburra wrote: Tue Jan 24, 2023 11:28 pm
nalor511 wrote: Tue Jan 24, 2023 11:22 pm
Kookaburra wrote: Tue Jan 24, 2023 11:19 pm
nalor511 wrote: Tue Jan 24, 2023 11:06 pm These are questions for Vanguard.
I asked. The rep couldn’t explain it further than the prepared statement.
I would kick it up the chain until you can get it answered. If you can't, then decide how impactful this is to you, and make your decision whether or not to do it
Or, I can ask here for others that have been in this position and converted, to ensure I get the “real deal” scoop. Surely, I’m not the only person who bought mutual funds before Jan. 2012 and wanted to convert to ETF.
I don't have experience here, but the statement makes sense. Here's my hypothesis;

Say you have three shares that you bought before 2012, at different times.

$10
$15
$20

Let's say that today, your original $45 of purchases is worth $60. This means you have $60 worth of mutual fund with a basis of $45.

Vanguard is going to convert that $60 of market value to a single lot. You're going to wind up with n shares with a basis per share of $45/n. You can't change the identification method here because all of the individual data has been averaged.

In other words, Vanguard is basically conjuring up a lot to make the math work. Anyone who had $60 worth of mutual fund of pre-2012 shares with a cost basis of $45 will wind up with the same computer ETF lot, regardless if that $60 was made up of 100 individual purchases or 1.
Northern Flicker
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Northern Flicker »

My understanding is that you can only use average cost for converted shares. I've thought that this meant that each conversion would result in a spec ID for each batch of converted shares as a parcel at the average basis for that parcel, but recently a Vanguard broker told me that all converted shares are treated as a single tax lot at their average cost even if they represent multiple conversions done at different times.

The above should not be a substitute for doing your own due diligence to get to the bottom of it.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
livesoft
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by livesoft »

Can you give us a sense of the number / dollar amount of the non-covered shares? If they are not a large dollar amount, then (a) can you give them away to your DAF or to a relative or (b) sell them (offsetting cap gains with cap losses) and get them out of your hair?

I have a large number of non-covered shares at Vanguard that I have always used Specific ID for the cost basis method, but my situation is different: They were all purchased in a single lot in 2009 in a TLH transaction and kept "pure" without reinvesting dividends, so that the average cost per share reported by Vanguard is the actual cost used by my Specific ID method.
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Topic Author
Kookaburra
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Kookaburra »

Northern Flicker wrote: Wed Jan 25, 2023 1:31 am My understanding is that you can only use average cost for converted shares. I've thought that this meant that each conversion would result in a spec ID for each batch of converted shares as a parcel at the average basis for that parcel, but recently a Vanguard broker told me that all converted shares are treated as a single tax lot at their average cost even if they represent multiple conversions done at different times.

The above should not be a substitute for doing your own due diligence to get to the bottom of it.
Wait- are you referring to non-covered shares, or all shares (covered and non-covered) that get converted?
Topic Author
Kookaburra
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Kookaburra »

exodusNH wrote: Wed Jan 25, 2023 12:14 am
Kookaburra wrote: Tue Jan 24, 2023 11:28 pm
nalor511 wrote: Tue Jan 24, 2023 11:22 pm
Kookaburra wrote: Tue Jan 24, 2023 11:19 pm
nalor511 wrote: Tue Jan 24, 2023 11:06 pm These are questions for Vanguard.
I asked. The rep couldn’t explain it further than the prepared statement.
I would kick it up the chain until you can get it answered. If you can't, then decide how impactful this is to you, and make your decision whether or not to do it
Or, I can ask here for others that have been in this position and converted, to ensure I get the “real deal” scoop. Surely, I’m not the only person who bought mutual funds before Jan. 2012 and wanted to convert to ETF.
I don't have experience here, but the statement makes sense. Here's my hypothesis;

Say you have three shares that you bought before 2012, at different times.

$10
$15
$20

Let's say that today, your original $45 of purchases is worth $60. This means you have $60 worth of mutual fund with a basis of $45.

Vanguard is going to convert that $60 of market value to a single lot. You're going to wind up with n shares with a basis per share of $45/n. You can't change the identification method here because all of the individual data has been averaged.

In other words, Vanguard is basically conjuring up a lot to make the math work. Anyone who had $60 worth of mutual fund of pre-2012 shares with a cost basis of $45 will wind up with the same computer ETF lot, regardless if that $60 was made up of 100 individual purchases or 1.
That makes sense, but they're already showing all non-covered mutual fund shares as a single lot (with date 'Various'). So what's the change? Also, will this conversion of non-covered shares preclude me from still using SpecID when I sell portion of the new "single lot" of ETFs?
exodusNH
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by exodusNH »

Kookaburra wrote: Wed Jan 25, 2023 12:07 pm
exodusNH wrote: Wed Jan 25, 2023 12:14 am
Kookaburra wrote: Tue Jan 24, 2023 11:28 pm
nalor511 wrote: Tue Jan 24, 2023 11:22 pm
Kookaburra wrote: Tue Jan 24, 2023 11:19 pm

I asked. The rep couldn’t explain it further than the prepared statement.
I would kick it up the chain until you can get it answered. If you can't, then decide how impactful this is to you, and make your decision whether or not to do it
Or, I can ask here for others that have been in this position and converted, to ensure I get the “real deal” scoop. Surely, I’m not the only person who bought mutual funds before Jan. 2012 and wanted to convert to ETF.
I don't have experience here, but the statement makes sense. Here's my hypothesis;

Say you have three shares that you bought before 2012, at different times.

$10
$15
$20

Let's say that today, your original $45 of purchases is worth $60. This means you have $60 worth of mutual fund with a basis of $45.

Vanguard is going to convert that $60 of market value to a single lot. You're going to wind up with n shares with a basis per share of $45/n. You can't change the identification method here because all of the individual data has been averaged.

In other words, Vanguard is basically conjuring up a lot to make the math work. Anyone who had $60 worth of mutual fund of pre-2012 shares with a cost basis of $45 will wind up with the same computer ETF lot, regardless if that $60 was made up of 100 individual purchases or 1.
That makes sense, but they're already showing all non-covered mutual fund shares as a single lot (with date 'Various'). So what's the change? Also, will this conversion of non-covered shares preclude me from still using SpecID when I sell portion of the new "single lot" of ETFs?
Based on what I've seen here, you'll have a single lot from all if your uncovered shares. Your covered mutual fund shares will map over 1:1 ETF lots. The number of ETF shares will vary based on the mutual fund:ETF NAV and the dollar value of each lot.

You'll be able to sell the ETF conversion by spec ID.

There's a lot of boilerplate here because you can't undo it and the brokerage account is a different legal structure than the mutual fund account. (This is why they can't just bulk convert everyone.)
Northern Flicker
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Northern Flicker »

Kookaburra wrote: Wed Jan 25, 2023 11:25 am
Northern Flicker wrote: Wed Jan 25, 2023 1:31 am My understanding is that you can only use average cost for converted shares. I've thought that this meant that each conversion would result in a spec ID for each batch of converted shares as a parcel at the average basis for that parcel, but recently a Vanguard broker told me that all converted shares are treated as a single tax lot at their average cost even if they represent multiple conversions done at different times.

The above should not be a substitute for doing your own due diligence to get to the bottom of it.
Wait- are you referring to non-covered shares, or all shares (covered and non-covered) that get converted?
The conversation I had with the broker at VG concerned covered shares.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Artsdoctor
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Artsdoctor »

You can definitely sell the non-covered shares using a specific lot ID method but it'll be up to you to keep track of the lots. Vanguard will lump everything into a non-covered share category and they will not report the cost basis to the IRS if you sell. To be thorough, you should send a note to Vanguard telling them what you've done at the time the sale but that will not change how they report a transaction on 1099-B. You'll enter the information on your Schedule D and it'll be a specific line that will state that the cost basis was not reported by the brokerage.
Roncole
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by Roncole »

Amazingly, I logged on to ask a similar question and, more amazingly, found your question almost immediately! I look forward to experts responding to you.

Assuming that any Mutual Fund shares bought before 2012 have appreciated massively, wouldn't it be better to sell shares bought after 2012 (using spec ident) to get the least gain or the most loss ? Hopefully, the oldest shares would eventually get a a step-up for your beneficiaries. To me, ETFs have an advantage because of their slightly lower expense ratios and lower taxable annual capital gain distributions.
FactualFran
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Re: Mutual Fund to ETF Conversion of Non-Covered Shares: Totally Confused

Post by FactualFran »

With non-covered shares, it is the responsibility of the taxpayer to report on the income tax return with a sale whether the sale used average basis; the default is cost basis. As a convenience to fund shareholder, Vanguard informs shareholders the basis as if each sale used average basis.

With cost basis, by default is that the first shares bought are treated first shares sold (first-in, first-out (FIFO)). Someone selling specific non-covered shares not in FIFO order needs to
  • specify to the or other agent the particular shares to be sold or transferred at the time of the sale or transfer
  • receive confirmation in writing from the broker or other agent within a reasonable time of the specification of the particular shares sold or transferred
The broker or agent does not have to do anything with the information about what specific shares were sold or transferred. The broker or agent is not responsible for keeping track of the basis of non-covered shares.

Later added
A specific answer is "Yes" to the question in the opening post: "Or, does this simply mean that all non-covered shares will convert over to ETF as a group, the system will continue to display them in aggregate and thus shows the average basis by default (just as it does now, and for the same reason), but that I can still sell individual lots of the non-covered ETF as long as I keep track on my end?".

You should be able to still sell individual purchase lots of non-covered shares, but I don't know how to indicate to the Vanguard web site how many of the shares being sold are to be non-covered shares. You still need to satisfy the IRS requirements with non-covered shares of informing the broker of what particular shares are being sold and receiving written confirmation from the broker that you specified the particular shares being sold.
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