Like-Kind Exchange

No. Like kind exchanges (§1031) can only be done with real estate.

Ira Smilovitz, EA Leonia, NJ

Agreed. I do know there are swaps of Mutual funds, different classes of the same fund for owners with a certain threshold of investment. A non taxable event to swap. I am wondering if there are times an ADR swap has the same tax effect.

Different classes of mutual funds aren't swaps or exchanges. You still own the same mutual fund, with the same holdings, - the only difference is that the sponsor adjusts the fees it charges you.

Ira Smilovitz, EA Leonia, NJ

It's a little more complicated than that. Some Vanguard funds are both conventional funds and ETFs, and they will let you do a one-time conversion of fund shares into ETFs, also tax free. I presume it's because they're still a claim on the same bundle of assets.

Funky Tax quirk: most mutual funds do a taxable distribution of realized capital gains at tne end of each year, but someone noticed that those Vanguard funds don't.

ETFs work by a system in which wholesale stock brokers pretentiously known as Authorized Participants can exchange large blocks of ETF shares for the equivalent bundle of the stocks or bonds that the fund holds and vice versa. The APs arbitrage the ETF shares against the fund assets to keep the ETF price the same as the asset value. Mutual funds have always been allowed to redeem in kind which is treated as an exchange so it's tax free. This means that an ETF has no capital gains and your ETF shares are like any other shares, you pay tax only when you sell them. This also means that ETFs need keep no cash reserve since they never have to redeem shares for cash.

For the Vanguard funds that have both regular and ETF shares, Vanguard and some friendly APs arranged to exchange out all the assets they would otherwise had to sell and exchange in what they would have had to buy, all without realizing any capital gains. At the moment no other fund manager does this since Vanguard has a patent on adding ETF shares to a conventional fund, but when the patent expires in a few years I expect they'll all do it.