SMH - huge surprise capital gains in taxable

[audreyh1]

I would rather get out in a strong market and pay taxes on a $2M cap gain than to wait to get out in a down market and pay taxes on a $1M cap gain.

Not if you are simply exchanging investments.

 

[yeartobefree]

This thread now explains why I saw CG on my Dec statements from Vanguard and the video is helpful in explaining the details, much appreciated. Silly question, but assume bc the CG were reinvested this 'steps up' the basis now yes?

 

[SecondCor521]

This thread now explains why I saw CG on my Dec statements from Vanguard and the video is helpful in explaining the details, much appreciated. Silly question, but assume bc the CG were reinvested this 'steps up' the basis now yes?

If they're mutual fund capital gains distributions, then no.

If they're capital gains from you selling something, and you then turned around and bought something else, then also no. However, in this case that cost does generally become the basis of whatever you bought.

 

[Sunset]

This thread now explains why I saw CG on my Dec statements from Vanguard and the video is helpful in explaining the details, much appreciated. Silly question, but assume bc the CG were reinvested this 'steps up' the basis now yes?

Often you will see you now have more shares of the fund. It should be in the details of the monthly statement.

 

[NW-Bound]

I stopped working at 55, and having no pension and not being of age to withdraw from retirement funds, I had to liquidate from taxable accounts to live on.

It came to a surprise to me that many of the MFs that I held for 20+ years did not have as much taxable capital gain as I thought. It was because I reinvested all MF payouts, and already paid taxes along the way on the gains.

On top of that, with no other incomes I was able to clear almost $100K/year on cap gain with no tax due. Nice!

And I was able to do that tax-free for a few years until I got to 59-1/2 to start drawing from retirement savings. And it was time too, because I nearly depleted the after-tax savings in those pre-59-1/2 years. It was not hard to spend a lot of money when you still have college-age children to support, and pre-ACA health insurance too.

I was glad I could live tax-free and did not have to do 72t withdrawals. Now, I am back to paying taxes like those pensioners.

 

[RunningBum]

Originally Posted by yeartobefree
This thread now explains why I saw CG on my Dec statements from Vanguard and the video is helpful in explaining the details, much appreciated. Silly question, but assume bc the CG were reinvested this 'steps up' the basis now yes?

If they're mutual fund capital gains distributions, then no.

If they're capital gains from you selling something, and you then turned around and bought something else, then also no. However, in this case that cost does generally become the basis of whatever you bought.

Sure it does, doesn't it? Not per share, but the overall basis. If you bought $10,000 of a mutual fund, and it has a CG distribution of $1000 which you automatically reinvest, you have $1000 of taxable capital gains income, and now have $11,000 overall basis in the mutual fund holding.

yearstobefree can verify this by looking at the current cost basis for their holding compared to the original purchase.

 

[SecondCor521]

Sure it does, doesn't it? Not per share, but the overall basis. If you bought $10,000 of a mutual fund, and it has a CG distribution of $1000 which you automatically reinvest, you have $1000 of taxable capital gains income, and now have $11,000 overall basis in the mutual fund holding.

yearstobefree can verify this by looking at the current cost basis for their holding compared to the original purchase.

I'm going to claim that the phrase "steps up" in the post I was responding to was muddying the waters. If you're paid a capital gains distribution by a MF, it does not do anything to the basis of the original shares. That was the concept I wanted to refute.

If you're paid any distribution by a MF, whether it's cap gains, dividends, or interest, and then reinvest that into additional shares of that (or any other) MF, then you generate a new lot of shares with that distribution amount as your cost basis for that lot. That's the way I tend to look at things.

For people that don't look at lots and/or use average cost basis, the water can get muddy.

 

[RetMD21]

The difference is the structure of MF vs ETF's is different. So redemption of shares is handled differently.

MF generate CGs for everyone when a bunch of people redeem, even if you don't redeem any, but ETF's don't as each ETF owner redeems their own shares just like a stock, not affecting the other owners.

The other annoying thing is I've never noticed a MF declaring a Capital Loss that a person could claim/carryover. They keep the losses internal.

But this isn't the most common reason for cgd. Your active mutual funds that had big yearly distributions likely were selling appreciated assets. ETFs do the same. Although redemptions can necessitate asset sales I doubt if it would happen often to a viable fund. Funds and ETFs use losses to offset current or future gains. They aren't allowed to distribute losses.

 

[HI Bill]

I just did basically the same thing last week. Swapped from Mutual Funds to ETF's for ~$550K - so very similar to your amount.

Next time ask for the MFs to be recharacterized to ETFs, as the transaction won’t be shown as a sale, and $0 taxes will be owed. I did this with VG, for all of my taxable brokerage funds.

 

[HI Bill]

Sure, if you have little in unrealized capital gains in your MFs then exchanging to a different investment isn’t very painful tax-wise.



Not in my case - my few remaining active funds have quite large unrealized gains in spite of paying out significant capital gains.

If VG recharacterizes your MFs to ETFs, there is no sale and no taxes. The basis remains the same.

 

[gamboolman]

Here's the rest of the story

Even a Blind Hog Finds A Acorn Every Once In A While.....

Looks like with Tax Loss Harvesting our Tax Bill will be in the ~$4K to $6k range and tops of ~$10K. Our CPA is engaged now.

Thanks HI Bill, ms Audrey and all the others for the excellent feedback in this thread.

I am pretty sure we will make more mistakes in the future - but, God Willing, it won't be this one !

School of Hard Knocks and all that .... ha ! Hopefully, I'll avoid future cases of painful Cranial/Rectum Insertion

Thanks, gamboolman...

 

[audreyh1]

If VG recharacterizes your MFs to ETFs, there is no sale and no taxes. The basis remains the same.

I don’t have Vanguard MFs that convert to ETFs, and the Vanguard MFs that do convert don’t issue more cap gains than the equivalent ETF anyway.

I’m generally converting from some older active funds to index funds when opportunities arise.

 

[RunningBum]

I'm going to claim that the phrase "steps up" in the post I was responding to was muddying the waters. If you're paid a capital gains distribution by a MF, it does not do anything to the basis of the original shares. That was the concept I wanted to refute.

If you're paid any distribution by a MF, whether it's cap gains, dividends, or interest, and then reinvest that into additional shares of that (or any other) MF, then you generate a new lot of shares with that distribution amount as your cost basis for that lot. That's the way I tend to look at things.

For people that don't look at lots and/or use average cost basis, the water can get muddy.

I figured that's how you were looking at it. I just didn't think a short "no" was a clear answer without knowing if they were asking about their original investment or their overall investment. I view it as overall unless I am selecting shares to sell.

 

[SecondCor521]

I figured that's how you were looking at it. I just didn't think a short "no" was a clear answer without knowing if they were asking about their original investment or their overall investment. I view it as overall unless I am selecting shares to sell.

Fair enough. I was cranky about something completely unrelated when I posted, and that probably affected the tenor of my responses.

 

[JoeWras]

I think the new white space filled Playskool-style UI of Vanguard does no favors in presenting unrealized gains. Yes, you can get the info, but if you have multiple taxable and no-tax accounts, you need to go to the top and hit a tab. It is not user-friendly to be required to scroll up above IRA accounts (where gains are not as important) when all you want to examine your potentially taxable gains.

The old UI (still available from a pulldown) does a better job of giving you quick unrealized gain information.

But I guess I'm picking nits. The point is, review your gains/losses when you look at balances. Get used to them. Let them settle in and take pause before doing anything.

 

[audreyh1]

When any MF distribution is paid out, your total unrealized gain is reduced by the same amount, due to the share price/NAV drop. It might even be negative! So be sure to take a look after the distribution if you don’t normally track it.

Some bond funds may treat their regular interest type dividend distributions differently, but the above will still apply for any cap gains distributions.

 

[Surewhitey]

You made someone happy...

 

[disneysteve]

When any MF distribution is paid out, your total unrealized gain is reduced by the same amount, due to the share price/NAV drop. It might even be negative! So be sure to take a look after the distribution if you don’t normally track it.

This is true, but keep in mind that funds only pay out their realized gains. There can still be unrealized gains.


I just checked the one fund we have. About 28% of our current balance represents unrealized capital gains. They do pay out gains every December but there's still a good chunk of money that won't be taxed until we sell.

 

[audreyh1]

This is true, but keep in mind that funds only pay out their realized gains. There can still be unrealized gains.

I just checked the one fund we have. About 28% of our current balance represents unrealized capital gains. They do pay out gains every December but there's still a good chunk of money that won't be taxed until we sell.

Oh, for sure! My point was simply that your unrealized gain drops after any distribution. The remaining unrealized gain can still be substantial as it is in a few of my funds as long as this market stays high.

I usually look at the unrealized gains on my older active MFs that I’m looking to exchange to something more tax efficient when the opportunity arises. If a fund has a large expected cap gains distributions, I check to make sure all expected distributions don’t exceed the unrealized gain in the fund. If they do, I go ahead and sell the fund before the distributions are paid out.

 

[Sue J]

Many of the posters here are looking to avoid capital gains in taxable accounts.

On the other hand, DH and I are still within the space where LT capital gains and qualified dividends are taxed at 0%. I'd like to take advantage of that while we can. Right now the investment in the taxable account is $30,000 in VASGX, a balanced 80/20 fund. For 2021 the total distributions (June and Dec) were $1,124 and we are paying 12% tax on only $253 of that, the balance of $871 is taxed at 0%.

Is this the type of fund that's best for taking advantage of the 0% space? Not selling any of this, we've held it for less than one year, but we could add more and invest in something else. Point me in the right direction, please.

 

[Out-to-Lunch]

Many of the posters here are looking to avoid capital gains in taxable accounts.

On the other hand, DH and I are still within the space where LT capital gains and qualified dividends are taxed at 0%. I'd like to take advantage of that while we can. Right now the investment in the taxable account is $30,000 in VASGX, a balanced 80/20 fund. For 2021 the total distributions (June and Dec) were $1,124 and we are paying 12% tax on only $253 of that, the balance of $871 is taxed at 0%.

Is this the type of fund that's best for taking advantage of the 0% space? Not selling any of this, we've held it for less than one year, but we could add more and invest in something else. Point me in the right direction, please.

Best to wait until the gains are long-term, but look into tax-gain harvesting: https://www.bogleheads.org/wiki/Tax_gain_harvesting

 

[disneysteve]

If a fund has a large expected cap gains distributions, I check to make sure all expected distributions don’t exceed the unrealized gain in the fund. If they do, I go ahead and sell the fund before the distributions are paid out.

How can the CG distribution be larger than the unrealized gains held by the fund? Where would that money be coming from?

 

[donheff]

How can the CG distribution be larger than the unrealized gains held by the fund? Where would that money be coming from?

I assume the funds gains are distributed equally based on shares held. If you bought into a fund just before a big surprise distribution you could get slammed.

 

[audreyh1]

How can the CG distribution be larger than the unrealized gains held by the fund? Where would that money be coming from?

I should have worded that differently, “make sure all expected distributions don’t exceed your unrealized gain in the fund.”

There is a big difference between your personal unrealized gain in a MF, and the unrealized gain in the fund itself. They don’t match.

As Don Heff points out, if you buy into a fund that already has a large unrealized capital gain, you can easily receive a cap gain distribution that exceeds your personal unrealized gain.

 

[FIREarly]

@jblack

Congratulations!! RPP (Rich People Problems!)
Different kind of "rich"

If you own a company, you can have a SOLO-IRA (think that's it, where you can put $40-$52k/year in it?... don't own an active company right now but it sounds very helpful!)

Your post has me positivity worried about future taxable withdrawals.