Selling before Year End Distributions

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SlowMovingInvestor
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Selling before Year End Distributions

Post by SlowMovingInvestor » Fri Nov 15, 2019 6:10 pm

[I posted a variant of this on the thread dealing with Vanguard's year end distribution, but this is probably a more general question]

If I want to reduce my holdings of a fund/ETF and there is an expected CG distribution of say 5% in that fund and for some lots in that fund, I have a gain of less than 5% (that includes losses), would it be to my advantage to sell those lots from a tax perspective before the distribution ?

Assume that my losses (and any gains < 5%) are all long term, and assume that I will have other distributions (mix of short and long term) that will more than offset any losses I might harvest through my sales (I.e. I don't expect any carryover of losses).

Note that the actual distributions from the fund will likely be slightly higher than 5%, since there would be dividend distributions for the quarter as well (assume around 0.25 - 0.5%).

Obvious caveat is that the fund could go up even on the day I request the sale and get me a 'profit' (although that wouldn't be a terrible problem to have).

venkman
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Re: Selling before Year End Distributions

Post by venkman » Fri Nov 15, 2019 11:45 pm

The 5% CG distribution will lower the fund price by 5%, so it should be a wash. Those CG's are already baked into the fund price, so you would realize them anyway if you sold now.

Whether or not you want to tax loss harvest is a separate issue, but the impending distribution shouldn't affect that decision.

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Re: Selling before Year End Distributions

Post by Shallowpockets » Sat Nov 16, 2019 8:21 am

I always see year end or any distributions as money in my fund, more shares going forward. If I pay taxes, so what. The new shares will surely rise over time. And more of them. So you get your 5% distribution and maybe your taxes are 20% of that, so you are ahead by 4%.
Someone could probably parse it down in more detail but basically that is it.

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SlowMovingInvestor
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Re: Selling before Year End Distributions

Post by SlowMovingInvestor » Sat Nov 16, 2019 8:25 am

I don't think I phrased my question properly. Let me try again

Assume I want to reduce my holding of a fund without incurring additional capital gains, and there is a 5% expected EOY distribution. Is it correct to say that selling off all lots with a gain < 5% would not incur any additional CG beyond what I would have received from the distribution if I had not sold ?

The answer seems obviously that it would not incur any additional CG, but I want to be sure I'm not missing something.

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Re: Selling before Year End Distributions

Post by stan1 » Sat Nov 16, 2019 8:47 am

If you were to sell it now would all of your gains be long term?

The distribution will be both long term and short term gains.

If you really don't want to hold this active fund in taxable any longer yes I'd sell it in entirety now for a long term gain rather than take the distributions which will be both long term and short term. It gets you out of the active holding and lets you invest in a passive index fund that is more tax efficient for the long term.

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Re: Selling before Year End Distributions

Post by livesoft » Sat Nov 16, 2019 9:11 am

I'd sell any fund in my taxable account that was expected to pay out 5% of its value as a capital gain distribution since it would probably be a terribly tax inefficient fund. I'd sell it now before there are any more possible gains.
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SlowMovingInvestor
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Re: Selling before Year End Distributions

Post by SlowMovingInvestor » Sat Nov 16, 2019 9:18 am

Yes, all my gains would be long term.

Unfortunately, several of my lots have a gain significantly larger than 5%, so I would prefer not to sell those. I haven't done all the calculations to see whether/when it might be worth to sell higher gain lots, but I assume it depends on my current rate, how long I expect to hold, projected future distributions etc.

Thanks for the comments !
Last edited by SlowMovingInvestor on Sat Nov 16, 2019 9:20 am, edited 1 time in total.

livesoft
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Re: Selling before Year End Distributions

Post by livesoft » Sat Nov 16, 2019 9:19 am

SlowMovingInvestor wrote:
Sat Nov 16, 2019 9:18 am
Unfortunately, several of my lots have a gain significantly larger than 5%, so I wouldn't be selling those.
Give those lots away to your DAF. Sell the lots that have losses. What's left then?
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Stinky
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Re: Selling before Year End Distributions

Post by Stinky » Sat Nov 16, 2019 9:22 am

livesoft wrote:
Sat Nov 16, 2019 9:11 am
I'd sell any fund in my taxable account that was expected to pay out 5% of its value as a capital gain distribution since it would probably be a terribly tax inefficient fund. I'd sell it now before there are any more possible gains.
+1

I wouldn't want to hold any fund like this. I'd rather harvest capital gains when I want to take them, rather than having the mutual funds "force" me to take them through distributions.
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Katietsu
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Re: Selling before Year End Distributions

Post by Katietsu » Sat Nov 16, 2019 9:26 am

SlowMovingInvestor wrote:
Sat Nov 16, 2019 9:18 am

Unfortunately, several of my lots have a gain significantly larger than 5%, so I would prefer not to sell those.
I do understand what you mean. But I do think that for some people using this language can push them to let the income tax tail wag the dog so to speak. How about: I have been fortunate to have some great gains in this fund. And thanks to the preferred tax rates, I will get to keep 85% of them if I sell now.

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Re: Selling before Year End Distributions

Post by SlowMovingInvestor » Sat Nov 16, 2019 9:35 am

Katietsu wrote:
Sat Nov 16, 2019 9:26 am
SlowMovingInvestor wrote:
Sat Nov 16, 2019 9:18 am

Unfortunately, several of my lots have a gain significantly larger than 5%, so I would prefer not to sell those.
I do understand what you mean. But I do think that for some people using this language can push them to let the income tax tail wag the dog so to speak. How about: I have been fortunate to have some great gains in this fund. And thanks to the preferred tax rates, I will get to keep 85% of them if I sell now.
In my case, it would be more like 72% (Fed + state), and if I sell enough, it might even put me into a higher tax bracket. Also, I would probably buy an efficient index fund/ETF with the cash, so I haven't quite taken these gains off the table.

Another annoyance would be that it might mean a federal underpayment penalty for previous quarters (even if I make a q4 payment). Unless I annualize, which is a bit of a pain to do.

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Re: Selling before Year End Distributions

Post by drzzzzz » Sat Nov 16, 2019 10:35 am

I just went through the same decision when I saw Vanguard's projected end of the year capital gains distributions for VGHAX (a mutual fund that I like but have in a taxable account). The fund yearly seems to generate a large percentage of capital gains and I would rather re-buy in a tax protected account or just use an ETF. When I calculated what my gains would be for selling the entire investment compared to what the distributions would be from Vanguard it was a relatively easy decision to make.

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Re: Selling before Year End Distributions

Post by SlowMovingInvestor » Sat Nov 16, 2019 4:50 pm

drzzzzz wrote:
Sat Nov 16, 2019 10:35 am
I just went through the same decision when I saw Vanguard's projected end of the year capital gains distributions for VGHAX (a mutual fund that I like but have in a taxable account). The fund yearly seems to generate a large percentage of capital gains and I would rather re-buy in a tax protected account or just use an ETF. When I calculated what my gains would be for selling the entire investment compared to what the distributions would be from Vanguard it was a relatively easy decision to make.
I am assuming you sold. What was the %age of embedded gains in your holding (or maximum %age if you used SpecID) ?

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Re: Selling before Year End Distributions

Post by drzzzzz » Sat Nov 16, 2019 7:31 pm

SlowMovingInvestor wrote:
Sat Nov 16, 2019 4:50 pm
drzzzzz wrote:
Sat Nov 16, 2019 10:35 am
I just went through the same decision when I saw Vanguard's projected end of the year capital gains distributions for VGHAX (a mutual fund that I like but have in a taxable account). The fund yearly seems to generate a large percentage of capital gains and I would rather re-buy in a tax protected account or just use an ETF. When I calculated what my gains would be for selling the entire investment compared to what the distributions would be from Vanguard it was a relatively easy decision to make.
I am assuming you sold. What was the %age of embedded gains in your holding (or maximum %age if you used SpecID) ?
approximately 30%, unfortunately this mutual fund seems to distribute both short term and long term capital gains on a regular basis, often of at least 5% - it was worth it to me to simplify my portfolio and make it more tax efficient for the long term; also this fund has potential capital gains exposure of around 42% per morningstar which to me means they will be distributing a large amount of capital gains in the future as well; i had also gifted some shares with a larger basis earlier in the year to some family members in lower tax brackets who would benefit from the gift

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