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Lulatsch
Returning Member

Are share class changes in HSA taxable events for CA state tax?

Early last year, my HSA provider performed some share class changes that caused some of my holdings to be converted from one class to another. Is this considered a taxable event for CA state tax? Seems somewhat problematic, as I didn't initiate these changes, and there was no way to avoid them. On the other hand, the transaction history shows each exchange as a pair of "SALE DUE TO FUND TRANSFER" for the old class and "PURCHASE DUE TO FUND TRANSFER" for the new class (same fund, same amount, same day).

3 Replies
BillM223
Expert Alumni

Are share class changes in HSA taxable events for CA state tax?

As you know, California considers your HSA to be a regular investment account.

 

As best as I can see, a conversion of class is probably nontaxable on the federal level, and so is probably not taxable on the state level.

 

However, the language of your transaction history gives me pause: "SALE DUE TO FUND TRANSFER" and "PURCHASE DUE TO FUND TRANSFER".

 

Why don't you contact your HSA support people and ask them to contact the support people in the regular investment part of their business, to ask them if this "conversion" would be taxable on the 1040 in a regular investment account.

 

If the answer is "no", then I would feel safe not reporting it to CA; but if the answer is "yes, it is taxable on the 1040", then I would report it to CA.

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Lulatsch
Returning Member

Are share class changes in HSA taxable events for CA state tax?

Unfortunately, my HSA provider is OptumBank, and they don't have a "regular" investment side of the business. To no-one's surprise, the agent whom I spoke to on the phone clearly had no clue at all about tax treatment of HSAs in CA.

 

On the plus side, I just did the math and as it turns out the conversion happened at a time when the market was low enough that none of my lots in these funds had any actual gains, so it seems like this is not going to have any impact either way (other than bookkeeping -- there were losses, but due to the immediate re-purchase in a different class I assume these would be subject to the wash sale rule).

BillM223
Expert Alumni

Are share class changes in HSA taxable events for CA state tax?

Glad the hear that this will not hold up your return. Just remember to document whatever you've done so that if California sends you a letter in four years (last year, they were four years behind on audit letters), you can tell them what you did and why.

 

I don't mean to imply that you will get such a letter (not at all likely), but in four years, you might well have no idea why you did what you did 😉

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