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Mutual Fund Conversion with a commission

Q_Ace

When converting a mutual fund, the cost after the conversion is the same as the cost before the conversion. If there is a commission that is charged, is there an easy way to distribute that commission across all of the Added entries for the converted mutual fund.

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Q_Ace

Maybe the better question to ask is what is the correct way to handle tracking the additional cost associated with the commission for the conversion.

Q_Ace

I have also noticed that Schwab tracks the purchase cost of the shares excluding the commission. If I look at their list of lots, I see the original cost basis for the mutual fund when it was purchased. Then when a sale is done on any shares of the new mutual fund, the commission from the conversion is added to the cost basis of the shares sold.

NotACPA

It would help if you provided some specificity as to what's happening. I.E., real numbers.

Chris_QPW

I think I understand the question, but investing questions aren't my best suite so others might have a better answer.

When I look at the Enter Transactions dialog and select Mutual Fund Conversion, there isn't anywhere for a commission. To me that tells me that it expected there isn't any cost in such a conversion. Which to me makes sense for this transaction. If all that is happening is that say the old security is being replaced by another then they certainly shouldn't be charging you for that.

The very fact that they are charging you and that it is a "sell" it sounds more like you aren't "converting" instead you are selling and buying. And as such you should be using those transaction types, and they allow for putting in the commission.

Q_Ace

Thank you for you input and help in trying to under stand this. I agree that it does appear to be a sell followed by a purchase but I see inconsistencies that I don't understand.

1. I was charged a commission that was drawn from the cash in my account.

2. The basis on the monthly statements indicates that the cost of the shares that were converted has increased by the amount of the commission. I would have expected the cost basis for the new Mutual fund to reflect the market price at the time of the purchase. This is not the case, the cost basis of the new fund shares = the cost basis of the old fund shares + the commission.

3. Schwab did not report any realized capital gain with this transaction.

4. The following year when some shares that were converted were sold, the cost of the shares in that sale reflected the commission paid with the conversion + the original cost of the shares.

5. Schwab is continuing to track the cost basis of each of the individual lots in the account at the original purchase price. The individual lots do not reflect the conversion commission or the market price at the time the conversion was done. This includes shares from prior to the conversion that were not sold.

Q_Ace

See the attached image for actual numbers. Quicken's cost basis for the ADDED entries agrees with the Schwab website. Quicken's cost basis for the sold shares is 7000, Schwab's cost basis is 7020. Schwab appears to be tracking the commission separately and then applying it to the first sale after the conversion.

image.png

Frankx

Hi @Q_Ace,

You said "I would have expected the cost basis for the new Mutual fund to reflect the market price at the time of the purchase". You cannot get a step-up in basis because a) you didn't dispose of the old shares, you converted them, and b) the only increase in basis that occurred was the fee you paid - which has correctly been applied to the cost basis of the new shares.

Think of it this way - IF you had sold the old shares and purchased the same "new" shares you own today, you would have had to report a taxable transaction and paid tax on any capital gain, or gotten the tax benefit from a capital loss (although doubtful it would go that way). You didn't do that and you paid no tax in connection with the "conversion". What happened is that you traded in certain securities in a what is known as a "like-kind" exchange so that you now own similar type shares with a slightly higher cost basis. That is how mutual fund conversions work.

Getting back to your original question - the additional cost (the commission) gets added to the original cost basis and is spread over the new shares pro-rata - exactly how Schwab is recording it.

Frankx

Q_Ace

"Getting back to your original question - the additional cost (the commission) gets added to the original cost basis and is spread over the new shares pro-rata - exactly how Schwab is recording it."

See the detail in the image I posted. This isn't how they actually did it. They appear to be tracking it separately.

q_lurker

a) Accepting @Frankx's answer that adding the commission to the cost basis is correct, and
b) assuming that commission should be allocated on a per share basis to the new holding, and
c) with your statement that cash did come from your account to pay this commission,

I would try a negative RtrnCap transaction on the new holding immediately after the conversion. A negative RtrnCap has to be generated using the Enter Transactions button and associated form using a negative value for the amount on that form. An in-line transaction entry will not record correctly. This would replace any existing MiscExp transaction you might have in place to address that change in the account's cash balance.

A correct negative RtrnCap will increase cost basis and decrease cash in the account. The change should be applied on a per share level.

I am not fan of RtrnCap transactions on multiple lot holdings, so check out the behavior in detail. Also, on any future changes to the holdings, watch closely to make sure the numbers continue to flow correctly. My reluctance to use RtrnCap is mostly from older program versions where the behavior was inconsistent.

Another possible approach would be to a) keep a MiscExp transaction in place to handle the change in the account cash balance, and b) edit the applicable Add Shares transactions to reflect the corrected basis that includes the commission.

Q_Ace

I have been assuming that they way that Schwab has been doing things is correct and Frankx is suggesting something different. Both may be valid ways to track the cost but I was looking to have quicken track the commission the same what that Schwab is. Schwab is not increasing the basis of the individual lots, Schwab appears to be keeping track of the commission in the total cost basis and then adding it one time to the total cost basis of any lots that are sold.

Using either of your suggested methods will increase the cost basis of each lot so they no longer match what Schwab shows. The total cost basis of all shares is correct after the conversion but prior to a later sale. After that sale of some of the shares, the total cost basis will also no longer matches what Schwab shows.

q_lurker

If the charge is actually a back-end load that might be waived or disappear if the funds are kept long enough, then the Schwab approach might make sense. Anything else, not so much.

To better emulate the Schwab numbers, the only other procedure I can concoct would be a Remove Shares / Add Shares pairing at time of sale. The add would have the increased basis. A commission on the sale would, I believe, reduce the gross proceeds and then not match Schwab’s gross.

Frankx

Hi again @Q_Ace,

I'm sorry, but above you said "The basis on the monthly statements indicates that the cost of the shares that were converted has increased by the amount of the commission. ... the cost basis of the new fund shares = the cost basis of the old fund shares + the commission.

And then you correctly quoted me to wit: "Getting back to your original question - the additional cost (the commission) gets added to the original cost basis and is spread over the new shares pro-rata - exactly how Schwab is recording it."

So my position aligns with both Schwab as well as the IRS. There's really nothing more to say - your cost basis is what it is. Whether you accurately reflect it in your Quicken file is your choice.

Frankx

Q_Ace

I was not clear in this statement. This statement was referring to the total cost basis of my ownership stake in the mutual fund. The cost basis of each of the lots remain unchanged.

Sum of ( cost basis of each lot ) + commission = total cost basis of my ownership shown on Schwab Statement.

q_lurker

Q_Ace said:

I was not clear in this statement. This statement was referring to the total cost basis of my ownership stake in the mutual fund. The cost basis of each of the lots remain unchanged.

Sum of ( cost basis of each lot ) + commission = total cost basis of my ownership shown on Schwab Statement.

You seem to be saying Schwab is being inconsistent - showing unadjusted basis by lot and adjusted basis for total holding. Can’t have both.

Q_Ace

I can understand that this is confusing, hopefully this clears things up.

On the Schwab website, I see.
(Fund 1 Lot 1 cost basis before conversion) = (Fund 2 Lot 1 cost basis after conversion).
This is true of every lot. Converting the mutual fund did not change the cost basis of each lot on the Schwab website.

On the Schwab statement, If I look at my holdings of the mutual fund after the conversion, I must add up the the cost basis of all of the lots and then add in the amount that was paid for the commission for it to agree.

or as an example

Before conversion the Schwab website shows
Fund 1 Lot 1 Cost Basis = 100
Fund 1 Lot 2 cost basis = 200
Fund 1 Lot 3 cost basis = 300
Cost basis of all holdings of Fund = 600
Total Cost Basis = L1 cost basis + L2 cost basis + L3 cost basis

After Conversion the Schwab website shows
Fund 2 Lot 1 Cost Basis = 100
Fund 2 Lot 2 cost basis = 200
Fund 2 Lot 3 cost basis = 300
Cost basis of all holdings of Fund = 620 ( this includes the commission of$20)
Total Cost Basis = L1 cost basis + L2 cost basis + L3 cost basis + commission

At the time of the sale the Schwab website shows
I Sold Fund 2 Lot 1 and Fund 2 Lot 2
Confirmation of the sale shows Cost Basis for Lots sold = 320
Cost Basis of shares sold = L1 cost basis + L2 cost basis + commission

After the sale is complete the website shows
Cost basis of all holdings of Fund 2 = 300
Total Cost Basis = L3 cost basis

Q_Ace

The formulas before the conversion should have been.
Total Cost Basis = L1 cost basis + L2 cost basis + L3 cost basis

(edited original to make correction - q_lurker)

q_lurker

So you want Quicken to make this same mistake?

Q_Ace said:

I can understand that this is confusing, hopefully this clears things up.
...
After Conversion the Schwab website shows
Fund 2 Lot 1 Cost Basis = 100
Fund 2 Lot 2 cost basis = 200
Fund 2 Lot 3 cost basis = 300
Cost basis of all holdings of Fund = 620 ( this includes the commission of $20)
Total Cost Basis = L1 cost basis + L2 cost basis + L3 cost basis + commission

The cost basis of all holdings needs to be the total of the cost basis of the individual lots. 100 + 200 + 300 does not equal 620, (so says Captain Obvious).

This also makes no sense --

At the time of the sale the Schwab website shows
I Sold Fund 2 Lot 1 and Fund 2 Lot 2
Confirmation of the sale shows Cost Basis for Lots sold = 320
Cost Basis of shares sold = L1 cost basis + L2 cost basis + commission

After the sale is complete the website shows
Cost basis of all holdings of Fund 2 = 300
Total Cost Basis = L3 cost basis

The entire commission is being charged off to the first sale? What if you only sold 1 share? A fractional share?

Your spreadsheet image dated the conversion to 2018 and the sale to 2019. What did your 2019 1099-B form show for the Gross Proceeds, cost, and gain/loss? (Only because I was trying to find a way for Quicken to match that as well.) Again, I see this behaving more like a back-end load rather than a commission.

Q_Ace

I'm not interested in getting into a discussion about whether Schwab's methods are correct or not and I do not know how they handle special cases. However, I am interested in finding out if there is a way for Quicken to track things the way that Schwab does.

To answer your questions in the last paragraph based on the data in the spreadsheet posted earlier. The 1099-B matched the bottom line in the spreadsheet.

2019 1099-B
Gross Proceeds = 8449.46
Cost Basis = 7132.58
Gain/Loss = 1316.88

Regarding the back end load question, I was charge $20 at the time the conversion took place. This was paid from the cash balance in my account.

q_lurker

Q_Ace said:

I'm not interested in getting into a discussion about whether Schwab's methods are correct or not and I do not know how they handle special cases. However, I am interested in finding out if there is a way for Quicken to track things the way that Schwab does.

To answer your questions in the last paragraph based on the data in the spreadsheet posted earlier. The 1099-B matched the bottom line in the spreadsheet.

2019 1099-B
Gross Proceeds = 8449.46
Cost Basis = 7132.58
Gain/Loss = 1316.88

Regarding the back end load question, I was charge $20 at the time the conversion took place. This was paid from the cash balance in my account.

To get Quicken to report the basis of the first two lots as including the $20 conversion fee and the third lot not having any part of that, you will need to make manual adjustments. I would likely do these dated just before the sale, but you might choose to do them at time of conversion; makes no consequential difference I know of.

Remove Shares transaction, 422.473 shares, specify the first two lots
Add Shares transaction 415.924 shares, acquired 12/27/13, Basis ???
Add Shares transaction 6.549 shares, acquired 3/17/14, Basis ???

Total of the two basis values would be the 7132.58, but how the $20 is allocated to the two lots is up to you. Again, I don't see a consequential significance. I would likely choose 6.549 / 422.373 * 20 = 0.31 to the second lot and 19.69 to the first lot leading to a first lot basis of 7019.69 and a second lot basis of 112.89.

If you date those Remove/Add transactions to the conversion date, Quicken is going to show those basis values (7019.69, 112.89, and 116.01 total 7248.59) between 1/18/18 and sale date of 2/1/19. If you defer the Remove/Add transactions to the date of the sale, Quicken is going to show 7000, 112.58, and 116.01 total 7268.59 between those dates. Your choice.

As I understand it, that is as close as you can get to Schwab's fuzzy math.