Re:The ETF Tax Dodge
by menage on Sunday March 31, 2019 @12:31PM
(#19536443)
Presumably the withdrawing investor also gets the fund's cost basis in the stock, so they'll be on the hook for the fund's capital gains themselves when they sell the stock. (The article didn't explicitly mention it, nor does the relevant statute https://www.law.cornell.edu/uscode/text/26/852#b_6, but that's the standard way that stock transfers work.)
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I'd like to see details on that part. My guess is each side of the exchange keeps their cost basis and just divides it over the new to them shares -- like in an untaxed merger stock transaction. Otherwise, it would be a competition to send the other party stocks with the lowest cost basis.
I think the basis stays with the fund, and the capital gains are due when the ETF holders sell their shares.
The bank does not get hit with any capital gains due to the lower basis of the fund. The bank has their own basis in the shares that they brought into the fund which when traded for the other shares may trigger its own separate capital gain.
The shares the bank gets back at the end should have price equal to basis by that point I would think.