Author Topic: Speculative investments to offset CGT embedded in index fund distributions?  (Read 1734 times)

misterhorsey

  • Bristles
  • ***
  • Posts: 363
In the past few years I switched a large part of my net worth from direct share holdings to the wholesale vanguard funds.  And now I'm a committed indexer. 

But one thing that took me by surprise was the CGT liabilities embedded in the annual fund distributions.  With direct shareholdings, although the volatility would occasionally create a cavernous hollow feeling in the stomach when certain shares would go into one day free fall, the fact that you had control and could manage CGT events was some consolation.

I still have a lot in direct share holdings and so currently have quite a few losses that I'm yet to crystalise. In accordance with my hopes and to my great surprise, some of these dud buys have recovered, and then become solid performers in my portfolio.  However, I do crystalise some losses at EOFY and that offsets the CGT liability I would otherwise have to pay from the vanguard fund.  But because Vanguard only tell you how much your CGT liability is after the end of financial year (30 June in Australia), it does involve a bit of guess work.

As I move more and more of my direct share investments into funds, eventually over time, I'm likely to have no losses to offset these gains against.  I know this is a good thing.

However, since I am destined to accrue some CGT liability each and every year from now on due to the fund distributions, it occurred to me that this might create a small investment opportunity.

Does anyone sink a small amount into speculative investments on the basis that - if I lose my money on it I can use it to offset my CGT liabilities,  but if it outperforms, everyone's a winner (me, the company and the Tax Office?)?

For example, one mining share services company I own went from around $1 (at which I bought), to 18c and is now sitting at $1.65.  If I kept a really small amount of cash aside for speculative plays primarily aimed at minimising my CGT, then this is the kind of share  I would be looking at. I was actually prepared to crystalise the loss on this company at one stage for CGT reasons but decided against it.  I was thinking of buying more when it went down to 18c because if I lost that capital, then it would simply offset my CGT tax liability.

It's like the small amount of capital gains that vanguard distributes provides an opportunity to seek a limited, capital guaranteed speculative investment opportunity.

Thoughts? Face punches? Etc?



AdrianC

  • Handlebar Stache
  • *****
  • Posts: 1076
  • Location: Cincinnati
Re: Speculative investments to offset CGT embedded in index fund distributions?
« Reply #1 on: September 09, 2016, 07:22:33 AM »
Are the tiny cap gains from Vanguard index funds even worth bothering about?

e.g. VTSAX
Realized capital gain/loss $0.01
Realized capital gain/loss as a % of NAV 0.02%

https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT#tab=4

misterhorsey

  • Bristles
  • ***
  • Posts: 363
Re: Speculative investments to offset CGT embedded in index fund distributions?
« Reply #2 on: September 09, 2016, 08:06:50 AM »
Everyone's exposure is different, and i'm in the Australian wholesale index fund, but last financial year I had capital gains of about $1k, with a liability of about $500 (50% discount of capital gains on assets held for over 12 months) 

It's not a huge amount, by any stretch.  But y'know, trying to optimise everything. Doesn't make sense to make your own lunch if you ignore these kinds of things.

My funds are growing so this year should be higher. 

AdrianC

  • Handlebar Stache
  • *****
  • Posts: 1076
  • Location: Cincinnati
Re: Speculative investments to offset CGT embedded in index fund distributions?
« Reply #3 on: September 09, 2016, 11:32:08 AM »
I wonder why index funds throw off so much in cap gains? A quirk of the Aussie tax system?

You'd need $5M in VTSAX to throw of $1K in cap gains.

I do have what I call my "funny-money" account where I sometimes buy a speculative stock, or more often just trade one that looks interesting (e.g. Apple recently). It's a tax-sheltered account, though, otherwise it wouldn't be as much fun.

I think if you need an outlet for that speculative urge there are probably worse ways to do it. My sister-in-law's sister does index trading spread-betting. Now there's a way to make yourself poor.

misterhorsey

  • Bristles
  • ***
  • Posts: 363
Re: Speculative investments to offset CGT embedded in index fund distributions?
« Reply #4 on: September 09, 2016, 05:54:25 PM »
I wonder why index funds throw off so much in cap gains? A quirk of the Aussie tax system?

You'd need $5M in VTSAX to throw of $1K in cap gains.

Yes, I'm not sure. I might go back and review my statements and give them a call to have a chat. I think I've only been in vanguard funds for a little over 2 financial years.  1k of cap gains from $5m invested has got me salivating.
 
I do have what I call my "funny-money" account where I sometimes buy a speculative stock, or more often just trade one that looks interesting (e.g. Apple recently). It's a tax-sheltered account, though, otherwise it wouldn't be as much fun.

I think if you need an outlet for that speculative urge there are probably worse ways to do it. My sister-in-law's sister does index trading spread-betting. Now there's a way to make yourself poor.

Despite my commitment to indexing, their is still a residual belief that I can sometimes beat the market. Sometimes, that is. If I don't do stupid things.  If I go for real beaten down stocks, with potential.  etc etc etc.  I'm not going to abandon my indexing strategy anytime soon but at least my proposal allows for me to harmlessly trade a tiny amount for funsies.

It's all a little theoretical at the moment. I still have loads of uncrystalised capital losses (although overall I'm ahead) that I should probably realise at some stage, but waiting for a low wage year to do it all.

marty998

  • Walrus Stache
  • *******
  • Posts: 6701
  • Location: Sydney, Oz
Re: Speculative investments to offset CGT embedded in index fund distributions?
« Reply #5 on: September 10, 2016, 04:59:51 AM »
I would think it is related to Property and Infrastructure Trust distributions (Dexus, Westfield, Sydney Airports etc).

It may also be due to takeover activity. If a company is acquired, it no longer forms part of the index and any gain is crystallised if scrip-for-scrip rollover is unavailable.

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 2230
Re: Speculative investments to offset CGT embedded in index fund distributions?
« Reply #6 on: September 10, 2016, 03:18:56 PM »
"... if I lose my money on it I can use it to offset my CGT liabilities ..."

The IRS shares some of your loss - not all.  The IRS insists you cancel out long-term capital gains first, which is at the 15% tax rate for most people.  So you lose $1000 dollars and the IRS absorbs $150 of it.  You've still taken 85% of the loss even after offsetting dividends and long-term capital gains.

misterhorsey

  • Bristles
  • ***
  • Posts: 363
Re: Speculative investments to offset CGT embedded in index fund distributions?
« Reply #7 on: September 11, 2016, 06:04:22 PM »
Hey Mush+1/2, sorry although its in my original post, I didn't specify in the heading that this relates to Australian shares.

Although the principles could still apply to other jurisdictions, subject to local factors such as those you've mentioned in your post.

In Aus, you can pick and choose your capital gains as you please.   But if you've held assets longer than 12 months then you only pay capital gains on 50% of your gain (although the full gain is offset against any losses - as I found out after my tax return one year).

Furthermore, if you've held assets prior to 1986 they are capital gains tax free.  But who has this kind of stuff?  Answer - Baby boomers with real property.