Tax Implications of Switching Brokers

What Doesn't Trigger Taxes

In-Kind Transfers (ACAT)

When you transfer investments via ACAT (Automated Customer Account Transfer), your stocks, ETFs, and other securities move directly from one broker to another. Nothing is sold. Your cost basis, purchase dates, and holding periods all transfer with your assets.

This is the most common way to switch brokers and is completely tax-free.

IRA Transfers (Trustee-to-Trustee)

Moving an IRA from one broker to another via direct transfer is also tax-free. The money never touches your hands—it goes directly from the old custodian to the new one.

401(k) to IRA Rollover (Direct)

A direct rollover from a 401(k) to an IRA is tax-free. The funds transfer directly between institutions. This is different from an indirect rollover (see below).

What DOES Trigger Taxes

1. Selling Before Transferring

If you sell your investments at Broker A, then transfer the cash to Broker B, you'll owe taxes on any gains. This is a common mistake—don't do it unless you have a specific reason.

2. Liquidating Non-Transferable Assets

Some assets can't be transferred and must be sold:

• Proprietary mutual funds: Fidelity-only funds won't transfer to Schwab
• Certain bonds or CDs: May need to be held to maturity or sold
• Cryptocurrency: Often can't be transferred between platforms
• Fractional shares: Some brokers liquidate these before transfer

If you must sell these, you'll realize gains or losses on your tax return.

3. Indirect (60-Day) IRA Rollover

If you take a distribution from an IRA and deposit it into another IRA yourself (instead of a trustee-to-trustee transfer), you have 60 days to complete the rollover. Miss the deadline, and the entire amount becomes taxable income plus a 10% penalty if you're under 59½.

Always do a direct transfer for IRAs. There's no reason to use the 60-day method.

4. Converting Traditional IRA to Roth IRA

If you're switching brokers AND converting from Traditional to Roth, the conversion is taxable (you'll owe income tax on the converted amount). But this isn't the transfer itself—it's the Roth conversion.

Cost Basis: The Hidden Gotcha

When you transfer investments, your cost basis (what you paid) should transfer too. But sometimes it doesn't transfer correctly.

The Problem

If your cost basis doesn't transfer, your new broker may show "$0" as your cost. When you eventually sell, this could make it look like your entire position is gain—leading to overpaying taxes.

The Solution

1. Before transferring, download your cost basis and purchase history from your old broker
2. After transfer, verify cost basis appears correctly at new broker
3. If it's wrong, contact your new broker to correct it (you may need to provide documentation)
4. Keep records of your original purchase prices forever

Wash Sale Rule Considerations

The wash sale rule prevents you from claiming a tax loss if you buy the same (or substantially identical) security within 30 days before or after selling at a loss.

When switching brokers, watch out for:

• Selling losers at old broker: If you sell at a loss, don't buy the same security at your new broker within 30 days
• Automatic reinvestment: Dividend reinvestment at your old broker could trigger wash sales on losses you've taken

Wash sales don't create extra tax—they just defer your loss. But they complicate your records.

Tax-Efficient Transfer Strategies

Strategy 1: Transfer In-Kind (Default)

Transfer all positions as-is. No tax impact. This is the right choice for most people.

Strategy 2: Tax-Loss Harvest First

Before transferring, sell positions that are down to realize losses. You can deduct up to $3,000 of net capital losses against ordinary income (excess carries forward).

Wait 31 days before buying the same securities at your new broker to avoid wash sale issues. Or buy similar-but-not-identical securities immediately (e.g., sell one S&P 500 ETF, buy a different one).

Strategy 3: Donate Appreciated Stock

If you have highly appreciated positions and make charitable donations, consider donating the stock directly instead of selling. You get a deduction for the full market value without paying capital gains tax.

Special Situations

Employer Stock (ESPP, RSU, Stock Options)

Transferring employer stock can be complex. The tax treatment depends on:

• How you acquired it (ESPP, RSU, ISO, NSO)
• Whether you've met holding period requirements
• Your cost basis (which may be split between ordinary income and capital gains portions)

Make sure your cost basis information is complete before transferring. Employer stock often has complicated basis calculations.

Retirement Account Types

• Traditional IRA to Traditional IRA: Tax-free (direct transfer)
• Roth IRA to Roth IRA: Tax-free (direct transfer)
• 401(k) to Traditional IRA: Tax-free (direct rollover)
• 401(k) to Roth IRA: Taxable conversion
• Traditional IRA to Roth IRA: Taxable conversion

Documentation Checklist

Before you transfer, save these from your old broker:

• ✓ Year-end statements (last 3 years)
• ✓ Cost basis reports for all positions
• ✓ Purchase confirmations for individual lots
• ✓ 1099 forms from previous years
• ✓ Any employer stock documentation (RSU vesting, ESPP purchases)

Keep these records indefinitely. If there's ever a cost basis dispute, you'll need proof.

The Bottom Line

Switching brokers via in-kind transfer is tax-free. The IRS doesn't care which broker holds your investments—only when you sell them.

The main things to watch:

• Don't sell before transferring unless you have a tax reason
• Verify cost basis transfers correctly
• Keep documentation from your old broker
• Use direct transfers for retirement accounts

If you're doing something complicated (Roth conversions, employer stock, tax-loss harvesting), consider consulting a tax professional. For a simple transfer, just initiate the ACAT and you're good.