By Solomon G. Teller, CFA, Chief Investment Strategist, Green Harvest Asset Management
Fall officially begins this Wednesday, and in many parts of the country, you can feel the change in the air and see the glorious changing colors of leaves. A less glorious display may be anticipated in this year’s estimates of year-end capital gains distributions.1
For example, 2021 estimates for several funds from the top 3 fund families already exceed 2%, which was the average distribution size across all mutual funds over the last 3 years – see chart.2 In addition, given year-to-date returns and the potential effect of investor redemptions, distributions for certain individual funds could be 5%, 0%, 20%, or even higher. A 10% capital gain distribution on a $1M fund position translates to 100,000 in taxable gains, which could cost the investor up to $40,800 in federal income tax alone (assuming the highest tax bracket on short-term gains).
Fortunately, there are solutions to these challenges. Investors can look to offset potential tax bites by transitioning existing holdings and/or maximizing Tax Loss Harvesting opportunities elsewhere in their portfolios. It’s not too late. Talk to us to learn more.
1 These distributions stem from realized gains that occur within the mutual funds themselves when underlying securities are sold at a profit. Neither mutual funds nor ETFs can pass through to investors any realized losses that accrue within their portfolios.
2 See for example, websites of top mutual fund families: Fidelity, Vanguard and American Funds for latest estimates
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when the portfolio is liquidated. Current performance may be higher or lower than that quoted. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.
GHAM does not provide tax advice and does not employ a Certified Public Accountant on its staff. We work with outside accounting firms and tax counsel that provide guidance and updates on relevant tax law, and we have reviewed the tax treatment of our transaction structures with those professional advisors. Based on those reviews, GHAM is satisfied that our structures support the desired tax results, but we urge clients to consult their
own legal and tax advisors regarding the tax treatment of the transactions effected in their GHAM account. Such transactions include ETFs. Federal, state and local tax laws are subject to change. GHAM is not responsible for providing clients updates on any changes in tax laws, rules or statutes. Clients remain fully responsible for their own tax positions. Although GHAM does not provide tax, legal or accounting advice, we stand ready to assist clients and their advisors in reviewing the relevant tax rules.
Reasons to harvest capital losses, sources of capital gains and the suggestion that mutual funds distribute capital gains are for illustrative purposes only. The availability of tax alpha is highly dependent upon the initial date and time of investment as well as market direction and security volatility during the investment period. Tax-loss harvesting outcomes may vary greatly for clients who invest on different days, weeks, months and all other time periods. A client’s tax alpha will depend on the client’s individual circumstances, which are outside of GHAM’s knowledge and control. All performance and tax benefit capture figures are derived from data provided from multiple third-party sources. All estimates were created with the benefit of hindsight and may not be achieved in a live account. The data received by GHAM is unaudited and its reliability and accuracy is not guaranteed.
This material is not intended to be relied upon as legal, investment or tax advice in any form or for any specific client. The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. All investments carry a certain degree of risk, and there is no assurance that an investment will perform as expected over any period of time.
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