Tax Help with Brokerage Account

[Debts_of_Despair]

2021 was the first year I had a taxable brokerage account.  The purpose of this account is medium term savings to fund things like an emergency expense, a car purchase or possibly a new home.  It is held entirely in VASIX.  I did not sell any shares in 2021, I only added funds.

 I was somewhat surprised to find out I owe taxes on all the capital gains and dividends the fund paid out.  My intention was to only pay taxes when I sold shares.  It is my understanding that since the share price dropped when dividends and capital gains were distributed, it would lower my tax liability when I finally DO sell some shares.  Essentially, it seems that I’m paying taxes annually rather than when I decide to cash out.  It would be my preference to pay taxes in the future rather than the present.  I do not expect any changes to my marginal tax bracket in the medium term.

Should I be something different to make this situation better?  Or is it all a wash and I shouldn’t worry about it?

[secondcor521]

Yes, you will report the capital gains and dividends on your 2021 tax return that you're probably working on.  This income may or may not result in additional federal income tax depending on the rest of your tax situation.

If you do have additional federal income tax that you end up paying on this income, then you are losing out somewhat.  Paying that money in taxes means it is no longer growing in your investments.

Generally speaking, the way to minimize or avoid this particular issue is to invest in investments which retain as much of their earnings as possible.  Then you will defer this kind of taxation you're seeing until you go to sell, hopefully much later.  Generally speaking, this means low-turnover funds like index funds, and/or individual stocks which pay low to no dividends.  Many people are not willing to lose the diversification that mutual funds provide in order to avoid this kind of taxation you're seeing.

You can put any new investments into the above kinds of investments.  If you go to sell your current investment (VASIX) in order to switch into these kinds of investments, then you may have a capital gain on which you would pay capital gains taxes when you sell to switch.  Some people sell over a period of several years to spread out the capital gains, and if they can do that under certain limits they can avoid federal income taxation on the capital gains.

All of this still adds to AGI and affects AGI related things like ACA subsidies, various tax adjustments and credits, FAFSA EFC/SAI stuff, and usually state income taxes.

[MDM]

Note that VASIX seeks to provide current income and some capital appreciation.

That is the opposite of your desire to have capital appreciation without current income, but it does match your desire to have a reliable source of funds for large lump sum expenses.

To get the long term benefits of stock growth, one has to be prepared to see large short term decreases in stock values.  Unfortunately there is no such thing as an investment that is safe from a decrease in value but has a high rate of return each year.  That does make "medium term" investing a difficult thing to judge.

One subtle distinction: you aren't taxed on unrealized capital gains each year, but you are subject to tax on capital gains distributions.  As secondcor521 noted, a capital gains distribution "may or may not result in additional federal income tax depending on the rest of your tax situation" because capital gains are taxed differently than ordinary income.

Bond interest (a large component of VASIX's "current income") is ordinary income and will be taxed as such.

[Debts_of_Despair]

Thanks for the replies.  It sounds like I might be better off with a different fund. VASIX is down quite a bit from when I purchased the bulk of it so I could trade into something else at a loss.  Any thoughts on VTMFX?

[MDM]

Any thoughts on VTMFX?

Vanguard's Product summary for that fund is worth a read.

See also Tax-efficient fund placement - Bogleheads

[MustacheAndaHalf]

If you're willing to determine your own stock/bond split, you could buy VTI and BND separately.  You might put your BND allocation in an IRA, and keep VTI in taxable.  That would be more tax efficient.  There's also tax-exempt bond funds if you're in a higher tax bracket.

[Gatzbie]

If you are using turbotax. It will connect with your Vanguard brokerage account & report the correct dividend amounts for you.