Let's keep this at one broker for a moment. If you look at your quarterly or annual statements, you will see several things. You will see interest, dividends, realized capital gains, and unrealized capital gains. Suppose fund manager sells Exxon and buys Chevron. The sale of Exxon creates a gain or loss that is reported to you on your annual 1099-B. Suppose Exxon paid a dividend, that was reinvested for you in more shares of the fund, but it was also taxable on your year-end 1099-DIV.
So suppose you buy a fund for $10,000, and at the end of year 1, the value is $10,500. You pay tax on $100 of capital gains and $100 of dividends. That means your cost basis is increased to $10,200 (the amounts you paid tax on) and the difference between the cost basis and share value of $300, is unrealized capital gains. You only pay tax on the gains you realized by the fund manager selling component shares. The unrealized gain, which comes from increased share prices, is not taxed year over year.
Now suppose you keep the shares 10 years. Over the years you paid tax on $10,000 of gains and dividends. Your cost basis is now $20,000. If the value of the shares is $25,000, you have $5000 in unrealized gains. You already paid tax on part of the increased value, but not all of the increased value. If you sell your shares, that $5000 is now taxable capital gains to you.
So yes, you do need to report the sale, and this should all be reported by the broker on your year-end tax statements.
The one caveat, as mentioned, is to make sure that the basis adjustments from broker 1 were properly carried over to broker 2. You will want to compare your last statements from the old broker with your first statements from Fidelity.
