Question

Okkay I feel like I should know the answer to this question but maybe I'am confusing myself. When you rebalance your portfolio in a taxable account are you paying capital gains tax? or does it not apply since money is staying within your account and you are just trading one mutual fund for another (say VTSAX for VBMFX)

Answer 1

I've never heard of being able to just trade one security for another. If you sell your holdings with gains to purchase others, it creates a taxable event in your taxable account. Not only that, but you may also have trading fees. You can potentially sell your mutual funds with losses to offset your gains to avoid at least some of your capital gains taxes.  

Answer 2

Don't get confused by vanguard's terminology on their website. Even though you are using the "exchange" button to sell from one account and buy into another, you are not actually "exchanging". You are legitimately selling and then buying. THIS IS A TAXABLE EVENT.  

Comments

Hmm. not having a vanguard account, I didn't know this. Do they charge a trading fee to do this too? If so, seems kinda sneaky.  

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True even for M1.  

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@toniatonic ahh okkay thats what was tripping me up! thanks!  

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@underscore Vanguard has no trading fees for Vanguard products. I think the same is true at Fidelity for Fidelity products

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I think the reason they were use the word exchange is because it allows you to sell a mutual fund and buy another with the proceeds simultaneously. If you were to just sell, you would have to wait for the original funds to settle and it would take multiple days to process your cell and buy actions.  

Answer 3

You could rebalance your portfolio by purchasing the underweighted funds until your allocation is balanced again - rather than selling off to rebalance. That would avoid a taxable event. Whether this makes sense would depend on how out of balance you are though and how much you're regularly investing.  

Answer 4

In addition to what has been sad, pay attention to short vs long term capital gains and the rate on long term gains. Sometimes it's 0% :-)

Answer 5

@lina4524 quick answer is the broker will send you a form = Make a profit = get taxed. Longer answer:  
https://www.investopedia.com/terms/...b.asp

Answer 6

@lina4524 be careful of the wash rule.  
https://www.investopedia.com/terms/...e.asp

Answer 7

Betterment + tax loss harvesting