SMH - huge surprise capital gains in taxable

[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]

Quote:

Originally Posted by HI Bill 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]

Quote:

Originally Posted by SecondCor521 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]

Quote:

Originally Posted by RunningBum 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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by disneysteve 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]

Quote:

Originally Posted by 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.

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

[disneysteve]

Quote:

Originally Posted by audreyh1 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]

Quote:

Originally Posted by disneysteve 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]

Quote:

Originally Posted by disneysteve 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.

[RetMD21]

Quote:

Originally Posted by 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.

Well it seems to be working for you so it is hard to criticize

[PoF]

Quote:

Originally Posted by SecondCor521 Like you, I try very hard to optimize my taxes. In general I think I do a pretty good job, but occasionally I make mistakes. Because of my personality, this is a hard pill to swallow. In the grand scheme of things, given the amount of money you're talking about, 23.8% is actually probably a pretty good rate to have paid. I doubt you'll pay much less than that on average when you hit your RMD ages. And if you were going to sell it to spend on something anyway, it's not that big of a deal really given that the cash would have made nothing and the investments could have moved against you between when you did sell and when you would have sold. The only scenario where it seems like a moderate error is where you would have and could have held that $500K in that taxable investment until death and then your heirs would have avoided the 23.8% via basis step up (assuming that's still around then). But then in that case, you've lived (presumably well) off other money, and your heirs are probably still getting a moderate to large inheritance. You're still probably doing far better than most and making far fewer mistakes than most. I'm pretty sure I am.

There's also the scenario in which taxable lots with a low cost basis are donated. We donate directly from our brokerage account to a Vanguard Charitable DAF, and nobody pays any capital gains on those lots.

[SecondCor521]

Quote:

Originally Posted by PoF There's also the scenario in which taxable lots with a low cost basis are donated. We donate directly from our brokerage account to a Vanguard Charitable DAF, and nobody pays any capital gains on those lots.

Right, good point. That's an excellent tax saving method.

[Gumby]

Quote:

Originally Posted by Chuckanut File this under misery loves company. Interesting article in today's WSJ about how Vanguard distributed some huge capital gains in their Target Date funds. It seems that if the TD funds were not in a tax sheltered account, well.... you can guess what happened. Check Jason Zwieg's column of 1/21/2022. https://www.wsj.com/articles/vanguar...se-11642781228

Following up on this. It appears that a class action lawsuit has been filed against Vanguard regarding this change. https://www.barrons.com/advisor/arti...?siteid=yhoof2

Quote:

Three investors are suing Vanguard Group for alleged negligence and breach of fiduciary duty, saying that changes the company made to target date retirement funds resulted in “massive tax bills” for individual investors.

[ERD50]

Quote:

Originally Posted by Gumby Following up on this. It appears that a class action lawsuit has been filed against Vanguard regarding this change. https://www.barrons.com/advisor/arti...?siteid=yhoof2

I agree with the lawsuit, it really was negligence on Vanguard's part, IMO.

But what would a remedy be? It's different for everyone, you'd need to figure your taxes with and without the excess gain (and what would the 'normal' cap gains be?).

I suppose a 15% across the board rebate could be justified. But IIRC, Vanguard fund holders are effectively the 'owners', so it's their own money they'd be getting back, though spread across all investors. So either way, Vanguard is hurt by this.

-ERD50