Author Topic: Selling a taxable actively managed fund  (Read 4239 times)

ecmcn

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Selling a taxable actively managed fund
« on: August 14, 2014, 10:55:10 AM »
20+ years ago my wife was given an investment in the Janus Twenty Fund (JNTFX). We've been focused on maxing out our retirement contributions and haven't been adding to it, so it's just been sitting there slowly growing while we pay taxes on it each year. I'd really like to get rid of it and move the money over to a Vanguard index fund. It's up to $29k and last year generated a taxable capital gain of $6100. We're in the 25% tax bracket so that's a big chunk of money every year to own something that's already more expensive due to fees.

My question is what's the best strategy for selling it? Would it be considered a long-term capital gain because she's owned it for so long and we've been paying taxes on it all the years, or because of the 71% turnover rate would it be considered a short-term gain taxable as income? Would it be worthwhile waiting for a downturn in the market to lower our tax bill? Also I just found out about capital gain distribution dates, which for this fund is in December. If I sold now would I skip that $6100 capital gain completely and just be taxed on the $29k, vs if I sold in January I'd be hit with both?

Thanks for any advice. I've recently gotten a good handle on my tax-deferred accounts, but these taxable funds seem to have another layer of complexity to consider.

Eric

welliamwallace

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Re: Selling a taxable actively managed fund
« Reply #1 on: August 14, 2014, 11:07:51 AM »
This is a little bit confusing. Capital Gains taxes should only apply when you realize those gains (when you sell the stock). You should not be "paying capital gains every year". There are however, annual taxes on dividends. Is that what you've been paying?

Yes, it would be counted as long-term capital gains when you sell the fund. Yes, you could offset this buy realizing a loss elsewhere (selling another fund or stock for less than you bought it for).

EDIT: Just realized I may be wrong on all this. I'm not sure how mutual funds work. Maybe you do have to pay taxes each year since thefund itself is realizing gains throughout the year
« Last Edit: August 14, 2014, 11:21:07 AM by welliamwallace »

welliamwallace

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Re: Selling a taxable actively managed fund
« Reply #2 on: August 14, 2014, 11:15:44 AM »
Also, when you sell, you aren't taxed on the whole $29k. You are taxed on your gain, which is the difference between the sell price and your "cost basis" (which is basically how much you paid). Your account should list your cost basis somewhere.

ecmcn

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Re: Selling a taxable actively managed fund
« Reply #3 on: August 14, 2014, 11:40:02 AM »
Googling "mutual fund capital gains distributions" yields a number of resources that talk about this topic, e.g.

http://online.wsj.com/news/articles/SB10001424052702303393804579311062915642246

Unless I'm misunderstanding something, the way it works is a fund manager actively buys and sells stocks chasing whatever market ups and downs they feel like, without much regard to the short and long-term gains all of these transactions are occurring. They just care about the top-line performance because that's what people primarily look at when buying a fund (it beat the Dow by 2%!). However somebody's got to pay taxes on all of those realized gains, and guess who that is?




NoraLenderbee

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Re: Selling a taxable actively managed fund
« Reply #4 on: August 14, 2014, 11:43:18 AM »
This is a little bit confusing. Capital Gains taxes should only apply when you realize those gains (when you sell the stock). You should not be "paying capital gains every year". There are however, annual taxes on dividends. Is that what you've been paying?

Yes, it would be counted as long-term capital gains when you sell the fund. Yes, you could offset this buy realizing a loss elsewhere (selling another fund or stock for less than you bought it for).

EDIT: Just realized I may be wrong on all this. I'm not sure how mutual funds work. Maybe you do have to pay taxes each year since thefund itself is realizing gains throughout the year


The fund buys and sells, and thus realizes capital gains (and losses) during the year. The OP has to pay taxes on that gain every year. It's completely separate from realizing a gain by selling the fund.

To the OP: I'm not certain (and don't have time to research it right now), but you should not have to pay tax on gains that have already been taxed in previous years. You'll have to pay tax on any gains realized this year. I'll look into it some more later.

Trirod

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Re: Selling a taxable actively managed fund
« Reply #5 on: August 14, 2014, 11:46:00 AM »
The timing doesn't matter that much.  Once they pay out the capital gain distribution, the price of the fund drops by a like amount, so your total capital gains realized will be similar regardless of whether you sell before or after the distribution date.

First of all you have to figure out your capital gain - which may not be that much.  IIRC the Janus Twenty fund was really clobbered when the tech bubble burst so even if it has a decent run up recently your basis may be petty high in this (remember those reinvested capital gain distributions count as basis).

Your gain will be long term for any of the fund units you have held for more than 12 months - so likely everything except the units presumably acquired with last year's $6,100 distribution (but your gain is likely to be quite small on this recent part so usually don't need ot be too concerned about this short-term gain).

Even if you decide not to sell, at least stop having the distributions reinvested and invest those in your choice of low cost index funds instead - that will stop the problem getting any worse.

welliamwallace

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Re: Selling a taxable actively managed fund
« Reply #6 on: August 14, 2014, 11:52:52 AM »
I feel like I just got a face punch regarding capital gain distribution. I had no clue that was a thing. I've just maxed out my tax-advantaged accounts for the first time, and haven't invested in taxable accounts yet. Thank you government for the gift of IRAs and 401ks.

ecmcn

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Re: Selling a taxable actively managed fund
« Reply #7 on: August 14, 2014, 12:10:42 PM »
Thanks for all of the advice. I'm 10+ years from FIRE and don't expect my tax bracket to get any lower before then, so I'm leaning towards selling it all, taking the hit now and getting the money in something that will have better long term growth.

welliamwallace - don't beat yourself up over this one. We've been seeing these end-of-year statements for a long time and only recently have I tried to understand the real meaning behind it.


ecmcn

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Re: Selling a taxable actively managed fund
« Reply #8 on: August 14, 2014, 01:21:20 PM »
To more fully understand how this works, does your cost basis continuously adjust as a fund trades shares?

An example: Say there's a fund that owns shares in 10 companies. You buy into it and your cost basis is set at the current value. That year the fund sells five of the stocks and buys five others, so you'd get capital gains (or loss) on those transactions that you'd have to pay taxes on. However your cost basis now adjusts to account for the new holdings, correct? You then sell the fund later in the year, and your gains cover the five stocks the fund never traded (with your original cost basis), plus the gains from the five new stocks since the fund bought them.

I guess I'm trying to project my understanding of how cost basis and gains work for an individual investor onto mutual funds, which with lots of trading, people coming in and out of the fund, reinvestment, etc. may not be applicable.

Cheddar Stacker

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Re: Selling a taxable actively managed fund
« Reply #9 on: August 14, 2014, 02:29:48 PM »
To more fully understand how this works, does your cost basis continuously adjust as a fund trades shares?

No.

Your cost basis is the original purchase price, plus any additional purchases via dividend re-investments. That's it. I doesn't really change much other than that.

However your cost basis now adjusts to account for the new holdings, correct?

No again.

When a fund trades a lot of shares, the fund pays taxes which reduces your returns since it reduces earnings. This has no effect on your cost basis. You don't pay any taxes on this. You pay taxes on dividends paid by the fund, or on capital gains from the sale of your shares of the fund.

ecmcn

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Re: Selling a taxable actively managed fund
« Reply #10 on: August 14, 2014, 03:57:42 PM »
I think you're right about the cost basis, however I don't think "the fund pays taxes which reduces your returns...You don't pay any taxes on this" is correct. In my case I got a 1099-DIV with $197 in dividends and $6158 capital gains. I didn't sell any shares, so the gains had to have come from the capital gains distributions, i.e. turnover. Either that or I want some money back from TurboTax.

This has a good description of it:

https://public.dreyfus.com/accounts-services/tax-center/cap-gains-faqs.html

Cheddar Stacker

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Re: Selling a taxable actively managed fund
« Reply #11 on: August 14, 2014, 08:23:37 PM »
I think you're right about the cost basis, however I don't think "the fund pays taxes which reduces your returns...You don't pay any taxes on this" is correct. In my case I got a 1099-DIV with $197 in dividends and $6158 capital gains. I didn't sell any shares, so the gains had to have come from the capital gains distributions, i.e. turnover. Either that or I want some money back from TurboTax.

This has a good description of it:

https://public.dreyfus.com/accounts-services/tax-center/cap-gains-faqs.html

Capital gain distributions are another animal, and yes you do pay taxes on them.

beltim

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Re: Selling a taxable actively managed fund
« Reply #12 on: August 14, 2014, 09:41:17 PM »

Capital gain distributions are another animal, and yes you do pay taxes on them.

Capital gains distributions come from the fund selling shares.  The fund itself never pays taxes.