Vanguard account - exchanges

[FerrumB5]

Hi Folks,

I'm thinking about exchanging one Vanguard fund for another  e.g. VIMAX -> VTSAX  and have a couple of questions.
I tried to reach Vanguard of course prior to posting here but to no avail - probably due to holiday season

1. My VIMAX is less than 61 days "old" - is it considered a short-term exchange?
2. What are general rules on funds exchanges within Vanguard?
3. Is there a cap gain loss if I exchange and not simply sell? If yes - how are they calculated? As short-term?
4. Any other distributions?
5. Any other advice?

I have 30k in VIMAX and 10k in VTSAX right now. Extra $100/mo goes to VTSAX.
Or am I simply overanalyzing and should just let it be - VIMAX seems to outperform VTSAX in very long run, but has 0.09 vs 0.05 ER

Thank you!
Happy Holidays

[MustacheAndaHalf]

You didn't specify if this was in a retirement account or taxable account.  If it's taxable, VIMAX just had a distribution in December, and you're saying you held it less than 61 days.  Note that's also the holding period for IRS "qualified dividends" at a lower tax rate.  If the investment is in taxable and you care about the taxes on $152, you might hold off and save some money.  ($30k x 0.005% distribution = $150)

[FerrumB5]

Yes, it's taxable. What is the short-term cutoff for IRS?

[MustacheAndaHalf]

If you have a purchase and sale of the same thing within a 30 day window, and have a loss, you need to read up on the IRS wash sale rule.  Selling all of the Mid Cap fund (VIMAX) might avoid the problem, but I'm not sure since I generally just wait.

You said your motivation is the expense ratio: 0.09% - 0.05% = 0.04% / year
$30,000 x 0.0004 = $12 / year

Qualified dividends are very easy to ignore, but I think you shouldn't for this case.  US median income is 25% bracket.  Qualified dividends for the 25% are taxed at 15%.  So let me run the Mid Cap $150 dividend through two situations:
(1) you sell now.  You did not wait 60 days, so you owe ordinary income tax on $150.
$150 x .25 = $37.50
(2) you wait 2 months (60 day rule) to make the dividends qualified.  You owe 15% tax on $150.
$150 x .15 = $22.50

So if you switch right now, I'd guess you'll pay $15 more in taxes to save $2 in expense ratio.  You can search for "qualified dividends irs" to find out more.  The critical sentence is under Holding Period: " You must have held the stock for more than 60 days ...".  So waiting 60 days might be more important than the expense ratio, in this case.

[FerrumB5]

Thank you! All clear now! Happy New Year!

[FerrumB5]

Vanguard response:
"All exchanges in a nonretirement account may also generate a taxable event.
Just like any other security, the gain or loss you experience on the
exchange (sale) will be coded as short-term or long-term based on the
amount of time you hold the fund. Anything held less than one year is
considered short term, and anything held over one year is considered
long-term"

Who has final word on it: vanguard or irs? If vanguard reports cap gains as short term that (in 1 full year) are technically long term for irs - irs doesn't care as this brings irs more money doesn't it?

[MustacheAndaHalf]

There's several definitions of short-term, all depending on context.  Vanguard is describing capital gains on a sale, while my post above concerned qualified dividends.

For a wash sale, 30 days is too soon.  If you have a buy and a sell of the same asset within 30 days, a wash sale results.  For the simple case, you sell some of an asset and can't deduct a loss if it's a wash sale.

For dividends, you must hold the fund 60 days to get qualified dividends tax rates.  Holding it for less time could be considered short term, and the dividends are taxed at ordinary income tax rates.

For capital gains, holding the stock/funds/ETF for over 1 year gives you long term capital gains tax rates.  Holding less than a year (and selling) gives you a short-term capital gain or loss which is taxed at ordinary income tax rates.