Total Return System - Capital Gain Tax on Liquidating Issue

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Neus
Posts: 110
Joined: Fri Sep 22, 2017 2:12 am

Total Return System - Capital Gain Tax on Liquidating Issue

Post by Neus » Thu Mar 14, 2019 4:42 am

So in my understanding of total return system, there would be a huge capital gain tax on liquidating if the investment has been running for several years, and let's say getting 100% unrealized gain

The reason to liquidate might be switching from distributing fund to accumulating ETF, perhaps to get lower fees as currently blackrock not vanguard offers accumulating ETF and unlike vanguard, and as far as i know, blackrock isn't so eager to reduces fees, so in case 10 years from now vanguard offers accumulating ETF with lower fees

I don't know yet what other scenario might makes me want to liquidate, but i think it makes sense to know because who knows what might happen in the future..

So just in case, what is the strategy to avoid this if the capital gain tax is quite high (in my case it's 30%)

AlohaJoe
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Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by AlohaJoe » Thu Mar 14, 2019 5:32 am

Neus wrote:
Thu Mar 14, 2019 4:42 am
So just in case, what is the strategy to avoid this if the capital gain tax is quite high (in my case it's 30%)
There's no "strategy" in general to avoid paying capital gains taxes.

It sounds like you are Europe somewhere, because you mention accumulating funds. Taxation issues are extremely location specific. By not saying where you are it is impossible to anyone to offer any other real advice.

A few places, like, say the US, will offer step-up basis on inheritance or allow you put stuff in trusts or offer discounts in special economic zones and things like that. Those aren't general purpose strategies, though.

Topic Author
Neus
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Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by Neus » Thu Mar 14, 2019 6:58 am

AlohaJoe wrote:
Thu Mar 14, 2019 5:32 am
Neus wrote:
Thu Mar 14, 2019 4:42 am
So just in case, what is the strategy to avoid this if the capital gain tax is quite high (in my case it's 30%)
There's no "strategy" in general to avoid paying capital gains taxes.

It sounds like you are Europe somewhere, because you mention accumulating funds. Taxation issues are extremely location specific. By not saying where you are it is impossible to anyone to offer any other real advice.

A few places, like, say the US, will offer step-up basis on inheritance or allow you put stuff in trusts or offer discounts in special economic zones and things like that. Those aren't general purpose strategies, though.
I'm in Indonesia

Indonesia has tax treaty with US but only limited amount of dividend income can be deducted, the rest of dividend income still went to personal income taxes therefore i prefer accumulating fund

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BeBH65
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Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by BeBH65 » Thu Mar 14, 2019 1:15 pm

Having to pay a lot of capital gains taxes is good, no? It means you have a lot of capital gains - your investments have done well.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

TedSwippet
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Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by TedSwippet » Thu Mar 14, 2019 2:26 pm

BeBH65 wrote:
Thu Mar 14, 2019 1:15 pm
Having to pay a lot of capital gains taxes is good, no? It means you have a lot of capital gains - your investments have done well.
Well yes. But. Having a lot of capital gains without having to pay a lot of capital gains taxes is better!

I wrestle with this problem, but have no easy answer either (because for me there simply isn't one). On dividends, I pay 32.5% tax annually, and would pay 20% in capital gains tax on sales. Clearly, in my case it is better to have capital gains rather than dividends, not only because the tax rate is lower but also because I can defer that tax and so let that extra capital compound gains. However, I cannot use accumulation funds to transform dividends into capital gains, because the UK's tax system sees through that and taxes accumulated dividends annually and just as if paid out. And sooner or later I will have to face paying some capital gains tax if I want to use this money.

So yes, as AlohaJoe said already, there is often no magic solution here. All you can really do is to console yourself with the knowledge that investing for 'total return' can provide a tax outcome that beats investing 'for income', with the differential being defined entirely by whatever local country tax laws operate for investors.

Topic Author
Neus
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Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by Neus » Fri Mar 15, 2019 9:06 am

TedSwippet wrote:
Thu Mar 14, 2019 2:26 pm
BeBH65 wrote:
Thu Mar 14, 2019 1:15 pm
Having to pay a lot of capital gains taxes is good, no? It means you have a lot of capital gains - your investments have done well.
Well yes. But. Having a lot of capital gains without having to pay a lot of capital gains taxes is better!

I wrestle with this problem, but have no easy answer either (because for me there simply isn't one). On dividends, I pay 32.5% tax annually, and would pay 20% in capital gains tax on sales. Clearly, in my case it is better to have capital gains rather than dividends, not only because the tax rate is lower but also because I can defer that tax and so let that extra capital compound gains. However, I cannot use accumulation funds to transform dividends into capital gains, because the UK's tax system sees through that and taxes accumulated dividends annually and just as if paid out. And sooner or later I will have to face paying some capital gains tax if I want to use this money.

So yes, as AlohaJoe said already, there is often no magic solution here. All you can really do is to console yourself with the knowledge that investing for 'total return' can provide a tax outcome that beats investing 'for income', with the differential being defined entirely by whatever local country tax laws operate for investors.
I see, so others has this issue too..

I think the possible problem in the horizon is fee, i’m not so sure but is it true that blackrock tends to hold their fees as high as possible while vanguard will try to reduce it’s fees to be as low as possible?

If that’s not the case, or as long as blackrock fees quite competitive, i think we’re going to be okay

We non US already paid higher fees than US counterpart with less option :(

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BeBH65
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Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by BeBH65 » Fri Mar 15, 2019 9:13 am

Please note that, currently, the ER of the Vanguard World Fund VWRL is higher then the equivalent combo IWDA/EIMI of BlackRock iShares.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm

Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by TedSwippet » Fri Mar 15, 2019 11:12 am

Neus wrote:
Fri Mar 15, 2019 9:06 am
I see, so others has this issue too.
There is actually an economic effect from capital gains taxes known as investment 'lock in'.

Suppose you hold stock ABC but it would be more efficient for both you and the economy as a whole if you could moving to stock XYZ instead. If your holding in ABC has a large built-in capital gain you might find that the tax cost of selling that and buying stock XYA more than destroys the benefit to you of moving, so you do not. As a result, the government does not collect capital gains tax, you accept a lower-than-optimum investment result, and company XYZ is potentially starved of resources that it could otherwise use to grow. So lose-lose all round, then.
Neus wrote:
Fri Mar 15, 2019 9:06 am
I think the possible problem in the horizon is fee, i’m not so sure but is it true that blackrock tends to hold their fees as high as possible while vanguard will try to reduce it’s fees to be as low as possible? If that’s not the case, or as long as blackrock fees quite competitive, i think we’re going to be okay
Blackrock are competitive with Vanguard at the moment. Of course, there is no guarantee that this will persist, but they are a reputable company with a decent track record so that is about all we have to go on. Market competition should ensure that costs stay relatively low.

The one danger I can foresee is for a fund provider to issue a new and lower cost class of ETF but leave the old ones in place with the higher charges. That way they can compete for new business but leave current investors somewhat stranded in the higher charge ETFs. This happened in places in the UK funds market when new regulations a couple of years ago forced fund providers to stop paying hidden 'bribes' to investment platforms.
Neus wrote:
Fri Mar 15, 2019 9:06 am
We non US already paid higher fees than US counterpart with less option.
Somewhat, but the gap is pretty narrow. For example, 0.07% for VUSD is hardly a 'high' fee.

And in some cases, non-US investors have the edge over US ones. For example, all UK investors can realise £11.7k/year in capital gains with zero capital gains tax, so moving to a lower cost fund or ETF, rebalancing, and so on could perhaps be done without any tax interference. The same thing might be impossible for many US investors.

Topic Author
Neus
Posts: 110
Joined: Fri Sep 22, 2017 2:12 am

Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by Neus » Sat Mar 16, 2019 9:36 pm

TedSwippet wrote:
Fri Mar 15, 2019 11:12 am
Neus wrote:
Fri Mar 15, 2019 9:06 am
I see, so others has this issue too.
There is actually an economic effect from capital gains taxes known as investment 'lock in'.

Suppose you hold stock ABC but it would be more efficient for both you and the economy as a whole if you could moving to stock XYZ instead. If your holding in ABC has a large built-in capital gain you might find that the tax cost of selling that and buying stock XYA more than destroys the benefit to you of moving, so you do not. As a result, the government does not collect capital gains tax, you accept a lower-than-optimum investment result, and company XYZ is potentially starved of resources that it could otherwise use to grow. So lose-lose all round, then.
Neus wrote:
Fri Mar 15, 2019 9:06 am
I think the possible problem in the horizon is fee, i’m not so sure but is it true that blackrock tends to hold their fees as high as possible while vanguard will try to reduce it’s fees to be as low as possible? If that’s not the case, or as long as blackrock fees quite competitive, i think we’re going to be okay
Blackrock are competitive with Vanguard at the moment. Of course, there is no guarantee that this will persist, but they are a reputable company with a decent track record so that is about all we have to go on. Market competition should ensure that costs stay relatively low.

The one danger I can foresee is for a fund provider to issue a new and lower cost class of ETF but leave the old ones in place with the higher charges. That way they can compete for new business but leave current investors somewhat stranded in the higher charge ETFs. This happened in places in the UK funds market when new regulations a couple of years ago forced fund providers to stop paying hidden 'bribes' to investment platforms.
Neus wrote:
Fri Mar 15, 2019 9:06 am
We non US already paid higher fees than US counterpart with less option.
Somewhat, but the gap is pretty narrow. For example, 0.07% for VUSD is hardly a 'high' fee.

And in some cases, non-US investors have the edge over US ones. For example, all UK investors can realise £11.7k/year in capital gains with zero capital gains tax, so moving to a lower cost fund or ETF, rebalancing, and so on could perhaps be done without any tax interference. The same thing might be impossible for many US investors.
Thank you for your thorough explanation

I see, interesting perk for UK investor indeed

I didn't realize VUSD is currently at 0.07%, if i'm not mistaken it's previously around 0.2% vs VOO 0.04%, good to know

Yes in that case it would be very uncomfortable for us holding fund with higher fees. Also currently IWDA has issue of not covering emerging market, therefore IWDA + EIMI combination to match total world VT, i suppose there would be one ETF that covers total world like VT in the future, or vanguard issuing accumulating version (in my case there's strong preference to vanguard), some people would face this liquidating and switch dilemma

I see so the term is "build in capital"? But i think this scenario is unlikely as the stock in this case is ETF not individual stock?

Topic Author
Neus
Posts: 110
Joined: Fri Sep 22, 2017 2:12 am

Re: Total Return System - Capital Gain Tax on Liquidating Issue

Post by Neus » Sat Mar 16, 2019 9:44 pm

BeBH65 wrote:
Fri Mar 15, 2019 9:13 am
Please note that, currently, the ER of the Vanguard World Fund VWRL is higher then the equivalent combo IWDA/EIMI of BlackRock iShares.
Noted, and distributing too, therefore IWDA should be more popular for now

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