Return of capital/principal in taxable account question

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Topic Author
OSUperu
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Joined: Fri Apr 05, 2019 4:27 pm

Return of capital/principal in taxable account question

Post by OSUperu » Sun May 17, 2020 11:25 am

Hello,

How is the return of initial capital in a post-income tax taxable account (or principal or basis...what is he preferred noun here?) calculated in order to not pay any type of tax?

Example: Lump sum $20,000 today into fund X, dividends not reinvested, followed by $2000 contribution every 1st of the month into the same fund. Flash forward after the 7th contribution and say there is $36,000. My capital/principle/contribution/etc is $34,000. So can I simply sell $34,000 worth of the fund in order to return my capital without paying any type of tax? I would assume that each contribution's shares purchased have either gained -or lost- so how is this all computed/known in order to pull out all of the initial capital? Basically using a taxable bucket as a 2nd rung of an EF or possible investment prop. down payment. Thus I'd like to understand how to return the initial capital w/o any tax burden.

Thanks
Last edited by OSUperu on Sun May 17, 2020 11:39 am, edited 1 time in total.

kaneohe
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Re: Return of capital/principal in taxable account question

Post by kaneohe » Sun May 17, 2020 11:38 am

your numbers are confusing...........did you mean lump sum 20K? Then after 2K/mo. additional contributions you would have invested 34K. If your value is now 36K, then if you sell 34K your gain will depends on your cost basis method. If you sell specific lots, you can pick the higher cost basis lots to minimize your gain. If you are buying funds and use the default average cost basis, then all shares are treated equally and you will have the same gain on all shares. However you also account for short term vs long term gains.

livesoft
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Re: Return of capital/principal in taxable account question

Post by livesoft » Sun May 17, 2020 11:42 am

If one uses a cost basis method of Specific Identification, then one can choose which shares to sell based on their date acquired and purchase price. Return of Capital is just that: The cost of the shares. One sells shares and not just the capital part of a share, so there will always be return of capital and an associated gain or loss when one sells a share or a fraction of a share. One cannot separate them. However, ...

if one sells at a loss, then it is all return of capital and no tax. Furthermore, the realized capital loss can be used to offset realized capital gains and to some extent even ordinary income.

For more information, please read IRS Publication 550.
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Topic Author
OSUperu
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Joined: Fri Apr 05, 2019 4:27 pm

Re: Return of capital/principal in taxable account question

Post by OSUperu » Sun May 17, 2020 11:47 am

kaneohe wrote:
Sun May 17, 2020 11:38 am
your numbers are confusing...........did you mean lump sum 20K?
Oops. Fixed that. But yes, the same scenario applies.

I will choose spec. id. cost basis plan.

Empirically it seems that one should be able to return all contributions w/o any tax, much like a roth cont.

So some shares with gains, would cancel out some shares with loses.

magicrat
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Re: Return of capital/principal in taxable account question

Post by magicrat » Sun May 17, 2020 11:55 am

OSUperu wrote:
Sun May 17, 2020 11:47 am
kaneohe wrote:
Sun May 17, 2020 11:38 am
your numbers are confusing...........did you mean lump sum 20K?
Oops. Fixed that. But yes, the same scenario applies.

I will choose spec. id. cost basis plan.

Empirically it seems that one should be able to return all contributions w/o any tax, much like a roth cont.

So some shares with gains, would cancel out some shares with loses.
If all lots have gains you can not return all capital without realizing capital gains

kaneohe
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Re: Return of capital/principal in taxable account question

Post by kaneohe » Sun May 17, 2020 3:14 pm

don't forget that the ultimate goal is to maximize after-tax returns , not to keep tax at zero. Would you rather have an account that tripled and that you would pay taxes on or an account that didn't gain anything and that you would pay 0 taxes on.
Last edited by kaneohe on Mon May 18, 2020 8:13 am, edited 1 time in total.

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Nate79
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Re: Return of capital/principal in taxable account question

Post by Nate79 » Sun May 17, 2020 8:16 pm

If you buy 1 share of ABC for $20 and it increases in value to $30 and you sell that share you will have a taxable gain of $10. You can not just sell the share for $20 and keep the gain unsold and untaxed. Now multiply this idea by each and every share you purchase.

Each share had a purchase price and will have a sale price. If there is a gain you will pay capital gains tax.

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celia
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Re: Return of capital/principal in taxable account question

Post by celia » Sun May 17, 2020 8:32 pm

If your distribution partly contains some "return of capital", you will probably get a K-1 at the end of the year (sometimes after April 15!) showing the breakdown of those distributions for the whole year. The K-1 could include principal, interest, dividends, rent, royalties, capital gains (realized by the company), etc, all to be reported on different sections of your tax return. Then each piece will be taxed the same as if you had received that part separately.

Schedule K-1

This looks like "Return of Capital" could show up on line 4b (but I haven't read the K-1 instructions)

Topic Author
OSUperu
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Re: Return of capital/principal in taxable account question

Post by OSUperu » Sun May 17, 2020 11:25 pm

Thanks all for the clear explanations. It's finally 'clicked'. :idea:
kaneohe wrote:
Sun May 17, 2020 3:14 pm
don't forget that the ultimate goal is to maximize after-tax returns , not to keep tax at zero. Would you rather have an account that tripled and that you would pays\ taxes on or an account that didn't gain anything and that you would pay 0 taxes on.
...and you are correct!

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