EVMO

Are there any tax implications for current MTGDX shareholders converting to EVMO shares?

Created August 06, 2025 at 07:48 PM

Short answer:

When a mutual‑fund share class is turned into an ETF, the tax treatment for the existing shareholders is not automatically “tax‑free.” In most jurisdictions—including the United States—the conversion is treated as a redemption of the mutual‑fund shares and a purchase of the new ETF shares. That means the transaction can generate a taxable event (a capital‑gain or loss) for the shareholder, and the new ETF shares will receive a fresh cost‑basis and holding‑period that starts on the conversion date.

Below is a step‑by‑step breakdown of the typical tax consequences, the factors that can modify the outcome, and practical steps you should take.

1. How the conversion works (from the news)

What’s happening: Morgan Stanley Investment Management is converting the Morgan Stanley Mortgage Securities Trust (MTGDX), a mutual‑fund share class, into the Eaton Vance Mortgage Opportunities ETF (EVMO).
Result for investors: Existing MTGDX shareholders will receive EVMO ETF shares in exchange for their MTGDX holdings.

2. Core tax principles that apply

Tax concept	What it means for this conversion
Redemption of mutual‑fund shares	When a mutual‑fund share is redeemed, the fund treats the redemption as a sale of the shares. The shareholder must recognize any realized capital gain or loss on the difference between the redemption price (the amount received) and the shareholder’s cost basis in MTGDX.
Acquisition of ETF shares	The ETF shares you receive are considered a new investment. Their cost basis is the fair‑market value of the ETF shares on the conversion date (i.e., the amount you received in the redemption). The holding period for the ETF starts on that date; you cannot “carry over” the MTGDX holding period for capital‑gain timing.
In‑kind vs. cash conversion	If the conversion is done in‑kind (you receive ETF shares directly rather than cash), the tax result is still the same as a redemption‑purchase: you must report the sale of the mutual‑fund shares. An in‑kind exchange does not automatically shield you from capital‑gain tax.
Tax‑reporting form	The fund will issue a Form 1099‑B (or the local equivalent) showing the gross proceeds from the MTGDX redemption and the cost basis of the new EVMO shares. You will need to report this on your personal tax return.
Capital‑gain type	Gains are generally short‑term if the MTGDX holding period was ≤ 1 year, otherwise long‑term. The same classification applies to the new ETF shares for any future sales.
State and local taxes	The same federal principles apply at the state level, but some states have different capital‑gain rules.
Wash‑sale rule	If you sold MTGDX at a loss and, within 30 days before or after the conversion, you acquire “substantially identical” securities (the ETF is considered substantially identical for wash‑sale purposes), the loss may be disallowed.

3. What this means for you today

Calculate any capital gain/loss on MTGDX
- Proceeds: The value of the ETF shares you receive (or the cash equivalent, if any).
- Cost basis: Your original purchase price (plus any reinvested distributions) of MTGDX.
- Gain/Loss = Proceeds – Cost basis.
- This amount is reported on Schedule D (U.S.) or the equivalent in your jurisdiction.
Establish a new cost basis for EVMO
- The fair‑market value of the ETF shares on the conversion date becomes the cost basis for the EVMO shares.
- Keep the trade‑date, number of shares, and price per share for future reference.
Holding‑period reset
- Your holding period for EVMO starts on the conversion date. If you later sell EVMO, the length of time you held those shares determines whether the gain is short‑ or long‑term.
Potential tax‑planning opportunities
- If you have a capital‑loss position elsewhere, you might offset the gain realized on the MTGDX redemption.
- If the conversion triggers a loss, you can use that loss to offset other capital gains.
- If you anticipate a large gain, consider whether you can defer the conversion until a later tax year, or whether you can spread the conversion (some funds allow a phased conversion) to smooth the tax impact.
Reporting
- Expect to receive a Form 1099‑B (or local equivalent) from Morgan Stanley/Eaton Vance in early February of the following year.
- The form will list the gross proceeds (value of EVM0 shares) and the cost basis (your original MTGDX basis).
- Use this information to complete the appropriate sections of your personal tax return.

4. Factors that could change the tax outcome

Factor	How it could alter the tax result
Conversion is structured as a “tax‑free exchange” (rare)	Some jurisdictions allow a Section 1031‑type exchange for certain securities, but ETFs and mutual‑funds are generally not eligible. If MSIM were to negotiate a specific tax‑free reorganization, the result could be different, but the press release does not mention such a structure.
Distribution of cash instead of ETF shares	If the fund distributes cash rather than ETF shares, the cash is still a taxable redemption; the cash can be reinvested in the ETF later, creating a separate purchase date.
Holding the ETF in a tax‑advantaged account (e.g., IRA, 401(k))	If the conversion occurs inside a tax‑deferred or tax‑free account, the redemption is generally not a taxable event at the individual level. The above rules apply only to taxable (non‑registered) accounts.
State‑specific “step‑up” rules	Some states allow a “step‑up” in basis for certain reorganizations. You would need to consult a local tax professional to see if any state benefit applies.
Foreign investors	Non‑U.S. investors may be subject to different withholding or capital‑gain rules (e.g., treaty rates, “portfolio‑share” classification).

5. Practical checklist for MTGDX shareholders

✅ Item	What you should do
Determine your MTGDX cost basis	Locate your original purchase confirmations, dividend reinvestments, and any prior return‑of‑capital adjustments.
Project the conversion value	Use the announced ETF price (or the NAV at the conversion date) to estimate the value of EVMO you’ll receive.
Calculate potential gain/loss	Subtract your cost basis from the projected conversion value.
Consider offsetting gains/losses	Review other positions in your portfolio that have capital gains or losses you can use for net‑ting.
Check account type	If the MTGDX holding is inside an IRA, 401(k), or other tax‑advantaged wrapper, the conversion is likely not taxable at the individual level.
Plan for reporting	Anticipate receiving a 1099‑B (or local equivalent) and keep the conversion confirmation for your records.
Consult a tax professional	Because the exact tax impact can vary by jurisdiction, holding period, and personal circumstances, a qualified CPA or tax adviser should review the conversion details with you.

6. Bottom line

Yes, there are tax implications for most MTGDX shareholders who convert to EVMO.
The conversion is generally treated as a sale (redemption) of the mutual‑fund shares followed by a purchase of the ETF shares, which can create a realized capital gain or loss that must be reported on your tax return.
The new ETF shares start a fresh cost basis and holding period on the conversion date.
The exact amount of tax you owe (or can offset) depends on your individual cost basis, the conversion price, and any other capital‑gain/loss activity you have.
Tax‑advantaged accounts (e.g., IRAs) are an exception—conversions inside those wrappers are typically not taxable at the individual level.
Professional advice is strongly recommended to confirm the specifics for your situation and to explore any planning opportunities that could reduce the tax impact.

TL;DR

For most investors, the MTGDX‑to‑EVMO conversion will be a taxable event: you’ll need to recognize any capital gain or loss on the redemption of MTGDX, and the ETF shares you receive will have a new cost basis and holding period. The exact tax you owe depends on your original MTGDX basis, the conversion price, and other portfolio activity. If the shares are held in a tax‑advantaged account, the conversion is usually not taxable at the individual level. Always confirm the details with a qualified tax professional.