You didn’t sell any shares during the year. It’s referred to as buying the distribution-and can make for uncomfortable client conversations about their taxable accounts. Buying now will saddle you with a taxable distribution as if you had been invested all year-regardless of the fund’s return. This transparency could help you in planning and give you insight into your clients’ tax situation.Īnd while talking about the timing of these estimates, ensure you and your clients make informed decisions about any material investment in a fund that is anticipating a capital gain between now and year-end. Reporting only $1 in December may keep a fund off a list of high distribution funds-but it does not reduce the investor’s total tax bill.Īt Russell Investments, we post our capital gains estimates every month-all year long. From the Internal Revenue Service's (IRS) perspective, $1 + $1 = $2. This may smooth out the payment amount (two smaller bites versus one big bite) but does not reduce the total distribution and total tax bill. Being in front of these distributions is key to all of the four A’s.īe aware that some fund companies pay capital gains distributions twice a year-not just at year-end. Now is the time to be aware of the size of these estimates and potential impact across your practice. We wrote previously about the four A's of preparing for capital gains season – Awareness, Assessment, Action and Advocacy.įund companies are starting the process of posting their estimates for capital gains. So, what can a tax-smart advisor do to prepare clients for those likely Form 1099s? Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly. For years 2001 through 2013, used oldest share class. % = Calendar Year Capital Gains Distributions / Year-End NAV. equity funds: Morningstar broad category ‘US Equity’ which includes mutual funds and ETFs (and multiple share classes). But the trend doesn’t appear promising, given the attractive stock market returns since 2009, with only one negative year over the last 12 years.Ģ021 YTD: As of September 30, 2021. We don’t know precisely yet what the percentage will be. Note the question mark - ? - over 2021 year-to-date (YTD) for the capital gains distribution percentage of NAV. What does the situation look like for taxable investors this year? There is often little correlation between how the market performs and the size of the average distribution.
Note that 2018 wasn’t an exception: That red distribution line is never below zero, meaning there have been distributions-on average-every year, regardless of how the market has performed. For a taxable investor with a $100 investment in one of those funds, they would have owed, on average, tax on $11 of that investment-even if they chose to automatically reinvest the distribution. equity fund distributed 11% of its NAV as a taxable distribution. equity funds’ average distribution as a percent of net asset value (NAV). Let’s just say it’s not like one of those sometimes-funny TikTok videos.
How has this experience been for taxable investors in recent years? For taxable investors, they will feel the sting of these amounts in 2022 with the receipt of Form 1099s in January and related taxes due on April 15.
Most funds start publishing their capital gains estimates in October and November, with the actual amounts posted and paid in December. If the realized gains are greater than the losses, the fund is required to distribute each investor’s pro-rata share of those gains. Tax-smart advisors can help manage this wealth erosion.Įvery year, mutual funds (both active and passive) add up their realized gains and losses for the fund’s fiscal year (typically Nov. For taxable investors, these distributions reduce both after-tax returns and after-tax wealth. Who has the time? Another trend not as obvious as TikTok, but no doubt as painful, is the annual repeat of material capital gains distributions coming from mutual funds. Staring at your phone to watch a seemingly endless stream of TikTok videos? While my kids are in, count me out. Big screen movies going direct to streaming services to watch at home? Count me in.