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In article <2019@uwmacc.UUCP> jwp@uwmacc.UUCP (Jeffrey W Percival) writes:
>It's my understanding that the IRS considers each such switch
>a sale and a purchase, exposing you to capital gains taxation
>on each switch.  If true, this would seriously erode the
>advantage such switches would offer in getting your money in
>the right fund at the right time.  Comments?
>
Yes, it's true.  However, if you don't make any money you won't
have any tax liability.  The trick would be to estimate how much
your profits would erode if you waited for the capital gains holding
period to complete.  If I could do that, I'd be "famous by Friday".

The Wall Street Week Elves have called switch about once a year for
the last 4 or 5 years, and Mark Hulbert offered anecdotal evidence
that hyperactive switching isn't any better than moderate switching.

Maurice

{decvax,sdcrdcf,ihnp4,ucbvax}!trwrb!suhre

> I've seen several postings talking about mutual funds that
> are actually a family of funds, which allow switching money
> from fund to fund, with just a phone call, with no load, etc.
> It's my understanding that the IRS considers each such switch
> a sale and a purchase, exposing you to capital gains taxation
> on each switch.  If true, this would seriously erode the
> advantage such switches would offer in getting your money in
> the right fund at the right time.  Comments?
> 
> -- 
> 	Jeff Percival ...!uwvax!uwmacc!jwp

The IRS does indeed consider a switch to be a sale and a purchase and
therefore you have to pay tax on any capital gains from the sale. Of
course, you can also write off any loss from the sale.  The key is whether
the capital gains (or losses) are short term or long term.  You are better
off tax wise if the capital gains are long term and the capital losses are
short term.

Frequent switching would cause any capital gains to be short term and thus
taxable as ordinary income.  Therefore switching funds would have to take
this into account.  Of course, tax consequences are not the only thing
to consider when switching investments.

				Keith Boucher HSI New Haven, CT

> > I've seen several postings talking about mutual funds that
> > are actually a family of funds, which allow switching money
> > from fund to fund, with just a phone call, with no load, etc.
> > It's my understanding that the IRS considers each such switch
> > a sale and a purchase, exposing you to capital gains taxation
> > on each switch.  If true, this would seriously erode the
> > advantage such switches would offer in getting your money in
> > the right fund at the right time.  Comments?
> > 
> > -- 
> > 	Jeff Percival ...!uwvax!uwmacc!jwp
> 
> The IRS does indeed consider a switch to be a sale and a purchase and
> therefore you have to pay tax on any capital gains from the sale. Of
> course, you can also write off any loss from the sale.  The key is whether
> the capital gains (or losses) are short term or long term.  You are better
> off tax wise if the capital gains are long term and the capital losses are
> short term.

It's worth noting that some mutual funds get around this disadvantage by
restricting their investors to using IRA funds.  Since all IRA withdrawals
are taxed as ordinary income, the fund managers are presumably free to
buy and sell without being restrained by capital-gains timing.  It remains
to be seen if this produces better results;  the one I've been in (Fidelity
Freedom) has done about as well as a good traditional growth fund like Fidelity
Magellan over the past year.

Sure, every fund exchange is a taxable event (of course, for IRAs that is
not an issue). There is a tradeoff and you have to decide whether it is
worth to switch or not (if you think the market is headed for a sharp decline,
it might be better to switch to a money-market fund and pay the taxes anyway).
--
    Eduardo Krell               UCLA Computer Science Department
    ekrell@ucla-locus.arpa      ..!{sdcrdcf,ihnp4,trwspp,ucbvax}!ucla-cs!ekrell