This is Not good For Investors

WSJ

A Tax Provision That Would Exempt Mutual-Fund Firms but Not Individuals

Mutual funds now exempted from proposal changing tax rules for some share sales

The provision would prevent investors from minimizing taxes, when they sell part of a position, by choosing the specific shares being sold. Instead, investors would have to sell their oldest shares first.

As first proposed, the change would have applied to fund companies as well as individuals.

But senators exempted fund firms after some of the largest ones, including Vanguard Group and Eaton Vance Corp. EV 0.56% , protested by saying the proposed change would tie their portfolio managers’ hands, make markets less efficient, and raise taxes on investors. 

If the change is enacted for individual investors, “it will take tax planning out of the hands of investors and advisers,

Interestingly it will take a big hole out of the marketing proposition of the robo advisors who make their tax loss harvesting a major part of their sell:

It would also affect firms like Parametric Portfolio Associates, a unit of Eaton Vance, and online financial advisers Betterment LLC, and Wealthfront Inc. These firms offer computerized tax-efficient investing strategies to individuals that typically use sales of specific groups of shares, or lots, to help boost after-tax returns.

It's rather amazing to me that the fund companies would lobby in their own interest but not in the interest of their clients. Could it be that they care more about juicing their returns and attacting assets rather than their clients after tax returns. Also this exemption will almost exclusively affect active fund managers since they do so much trading and would be keeping track of tax lots. I am not sure even this would apply to ETFs and even if it did , since they do little of such trading the impact would be minimal.

An explanation from the WSJ

Although the change would no longer affect securities sold by managers of active or passive mutual funds and exchange-traded funds, it would affect individuals who sell part of their investment in such funds.

Here’s how. Say an investor owns two lots of a sector fund bought at different prices, and they are in a taxable account rather than a tax-deferred retirement account. If the fund is trading at $90 per share now, each one acquired five years ago for $65 would have a $25 taxable gain.

But each share bought two years ago for $110 would have a $20 loss.

Under current law, investors can choose which fund shares to part with. So selling the ones that cost $110 would produce a loss to offset other gains, while selling the ones that cost $65 would produce a taxable gain.

If the provision is enacted, the first shares sold would be assumed to have a cost of $65 each, and the investor couldn’t sell the $110 shares until the $65 shares were gone.