Tax & EvaluationQuestion 99 of 110
An investor exchanges shares of a growth fund for shares of a bond fund within the same fund family at net asset value. For tax purposes, this exchange is:
a.A taxable event, treated as a sale of the growth fund and a purchase of the bond fund
b.Tax free, because no sales charge was paid
c.Tax free, because the money never left the fund family
d.Taxable only if the exchange occurs within one year of purchase
Explanation
An exchange privilege waives the sales charge but does not change the tax character of the transaction: the investor has disposed of one security and acquired another, so any gain or loss is recognized. This is a frequent source of surprise tax bills for customers and should be disclosed before the exchange. Timing affects only whether the gain is short or long term.
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