Distributed Capital Gains From An ETF

YurieGlovotch | Oct 23, 2022 | 105 posts since 2020

Are all LTGC treated the same regardless if they are generated by a fund manager and passed through or when a capital gain is generated by the investor when selling shares? According to what I read, those in the 10% or 15% tax bracket pay 0% capital gains tax up to $83,350 of income. I was hit wtih a $17K distribution from an ETF this year.

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w00d00w | Oct 28, 2022 | 360 posts since 2012

Like you mentioned, LTCG can be federally taxed at 0% if marginal income tax rate is 12% or less.

in 2022 for married filing jointly, the upper limit of 12% income tax bracket is $83550 and the 0% LTCG upper limit is $83350. So for example, if a couple has $80000 of taxable income (not including LTCG) plus $20000 of net LTCG, then $3350 of the LTCG would be taxed at 0% rate and $16650 would be taxed at 15% rate.

YurieGlovotch | Oct 29, 2022 | 105 posts since 2020

Right on Bro! You guys are savvy investors. No doubt about it. I suggest everyone take a look at ETF's that do Call Options. For example ETV distributes mostly ROC. The IRS considers ROC to be "Non Dividend Distributions" and are not taxable. You have to track your ROC and subtract it from your cost basis. If your cost basis (adjusted cost basis) hits zero, additional distributions are counted as capital gain in the year received. I've never actually come close to zero cost because I keep purchasing additional shares on market dips to keep up with inflation. However, this was an unusual year and I got a 17K LTCG distributon. No worries mate since I keep myself in the 12% bracket. You can find more info at CEF Connect that tracks closed end funds. Symbols I watch: EOI EOS ETB ETV ETW ETY EXG.

CuriousDave | Oct 29, 2022 | 233 posts since 2018

Until a few years ago it was true that LTCG ( after subtracting capital losses) was federally taxed at 0% to those whose federal tax bracket rates were 12% or less. In more recent years there is a separate tier of rate brackets for LTCG and Qualified Dividends, though the differences compared with the regular brackets are small. For 2022 for example, while the upper income threshold for 12% income tax bracket of marrieds filing jointly is $83,550, the upper income limit for those couples to qualify for the 0% rate on LTCG and Qualified Dividends is $83,350, a difference of $200 (Source: Rev. Proc. 2021-45, Sec. 3.03 (“Maximum Capital Gains Rate”).

Sylvia | Oct 27, 2022 | 389 posts since 2012

All my ETF's are index funds. The distributions I've seen tend to be a mix of qualified and ordinary dividends. Capital gains distributions are more common among mutual funds, particularly actively managed ones. Qualified dividends are treated as LTCG.

YurieGlovotch | Oct 29, 2022 | 105 posts since 2020

Excellent. Your comments jibe with what I read on Investopedia. ". . . . . . a qualified dividend is taxed as a capital gain at rates of 20%, 15%, or 0%, depending on the tax bracket."

Kirkland | Oct 29, 2022 | 374 posts since 2014

Yes, So for those single that are retired, with low income, you can invest and hold dividend paying stocks, and those quarterly dividends (auto long term treatment), which are almost all considered qualified, are all tax free if for 2021 (not sure what 2022 amount was) your total income is under $40,400. So interest earned on a CD, for example, is not treated the same way, and you pay tax rates as ordinary income on interest. This is the advantage owning dividend paying stocks has over putting your money in CD's. (you get long term capital gain rate treatment) Especially when interest rates were Zero for so long and you got nothing from having your money in the bank. As interest rates go up, and we can now get 3.50% interest in a savings account, well then, maybe stock market investors are not going to take the risk in these high flying over valued tech stocks that these balloons are now being punctured and the air is coming out and us value investors (in dividend paying stocks) are going to be ok. :)

CuriousDave | Oct 29, 2022 | 233 posts since 2018

For people in those low tax brackets there is also a loophole (probably unintended by Congress) by which one can do limited “wash” sales with gains that can save long capital capital gains taxes down the road. Suppose for instance that you hold stocks whose values have appreciated by, say, $20,000 over more than 12 months and which you wish to continue holding for some time because you expect continued appreciation in value. If you file a joint tax return with your spouse and expect your taxable income for 2022 to be no more than $63,350, you should consider selling the stock shortly before the end of this year, followed by a repurchase of an equal quantity of shares of that company in early January 2023. Your taxable income for 2022 will then be no more than $83,350, so your tax on the long term capital gain of $20,000 will be zero (watch out though for state tax, because most states will tax all capital gains at the same rate as ordinary income; this strategy works best if you live in a no-tax state like WA, TX or FL). Your tax basis of the shares you re-acquire in January 2023 will be the new, higher price, so if you sell them later, your taxable gain will be reduced by the $20,000. This technique will not work for low income retirees collecting Social Security benefits. The inclusion of the $20,000 in taxable income will increase the taxable portion of the benefits because of the special formula that is used for taxing them, which will cause your taxable income to exceed the $83,350 threshold.

w00d00w | Oct 30, 2022 | 360 posts since 2012

i think the term for this technique is "tax gain harvesting." i don't generally like to quibble about semantics, but the mention of "wash" sales had me confused for a moment. although there is a swapping of identical assets going on, the wash sale rule only applies when selling at loss.

YurieGlovotch | Oct 27, 2022 | 105 posts since 2020

Well, looks like I'll have to answer my own question. After doing some intense diging, apparently capital gains from the sale of an asset are treated the same as mutual fund or ETF capital gains distributions. From Investopedia: "Holders of mutual fund shares are required to pay taxes on capital gains distributions made by the funds they own. Capital gains distributions from mutual fund or ETF holdings are taxed as long-term capital gains, no matter how long the individual has owned shares of the fund, which means a tax rate of 0%, 15%, or 20%, depending on the individual's income tax rate." Translated, if you are in the 10% or 15% tax bracket, the tax on LTCG is 0% up to $80,800 (Joint) of income.

Ltssharon | Oct 27, 2022 | 471 posts since 2020

I would think long term capital gains (over 1 year) are taxed differently than short term capital gains. I am definitely not an expert so I hope someone else also replies.

YurieGlovotch | Oct 27, 2022 | 105 posts since 2020

STCG are taxed as regular income while CG distributions from mutual funds or ETF's are all considered to be exclusively LT.

CuriousDave | Oct 29, 2022 | 233 posts since 2018

Only LTCG distributions from mutual and index funds (as well as qualified dividends) qualify for the federal LTCG rate. If short term capital gains are distributed by such funds they are taxed as ordinary income.It’s true though that how long the investor has owned an interest in such funds doors not affect the nature of the pass through gains from the funds. This means the timing of your purchase of such funds can have important tax consequences. It’s usually a bad idea to make the purchase before around mid-December, which is when most of these funds credit the accounts of their owners with capital gain distributions. Recall that as yet unpaid distributions are in effect included in your purchase price, so that price will include taxable income to the extent of those distributions. Similar to “cum-dividend” versus “ex-dividend” purchases of individual stocks.“Pure” index funds like SPDR and QQQ are much more tax efficient because most of their underlying stock sales are made only once or twice annually for portfolio balancing purposes, so their capital gain distributions tend to be much smaller than those for mutual funds and specialty index funds which have much higher stock turnovers.Also, let’s bear in mind that the reduced tax rates for long term capital gains apply only at the federal level. Most states that have an income tax will tax them at the same rate as ordinary income.

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