Article was update on November 15, 2023
Capital gains distribution season is fast approaching. Compared to last year, the level and extent of capital gains Vanguard will be pushing out to shareholders is less, but regardless of their size, now’s the most important time to pay attention to the details and the calendar.
Every December, Vanguard, like all its mutual fund industry competitors, pays out all of the interest, income and capital gains that have accumulated over the calendar year. This isn’t a choice; it’s a legal requirement.
A few weeks back, I provided an early look at what we might expect from distribution season. Today, I have a more in-depth preview for you.
When it comes to retirement accounts (IRAs, 401(k)s, etc.), you don’t have to be so cautious. But many of you have investments in taxable brokerage accounts—that’s where you need to be paying attention.
My goal is to give you the information you need to navigate the payout season with confidence. Capital gains don't make for riveting conversation, but they are, nonetheless, very important. So, before diving fully into the topic, here are the key things you need to know:
- If a fund is poised to make a distribution and you own shares on its record date, you will receive that distribution.
- Don’t buy a fund (in your brokerage account) right before it is scheduled to pay out capital gains.
- If you are going to sell a fund at a loss to reduce your tax bill, don’t buy any shares in that fund in the 30 days prior to and the 30 days after the day you plan to sell it. (Reinvesting income counts as a purchase, so beware.)
- I’ve provided a list of all the Vanguard funds set to pay out capital gains as well as a breakdown of the key dates you need to watch.
Capital Gains 101
If you’re already a capital gains expert, congrats! But since capital gains season only comes around once a year, it’s worth reviewing the basics to ensure we’re all on the same page.
Mutual funds and ETFs must (by law) distribute to shareholders any capital gains they have realized (plus the interest and dividends they’ve received) at least once a year.
Dividends and interest are straightforward. If a stock pays a dividend, the mutual fund passes that dividend on to shareholders. If a bond pays interest, that interest gets passed along as well. Mutual funds typically extract their expenses from these interest and dividend payments, so what’s left over is the money that is distributed to shareholders.
Realized capital gains, which are the net trading profits the fund generated during the year, are a little trickier.
In all funds, even index funds, the portfolio manager buys and sells stocks and bonds throughout the year. When a position is sold, it is either sold at a profit or a loss. When the fund tallies up those trades near the end of the year, if the profits outweigh the losses, then the net “capital gains” must be distributed to shareholders.
If there is a net loss, shareholders can’t claim those losses on their own tax returns. However, the loss gets carried over into the fund’s next tax cycle.
As I said a few weeks ago, Vanguard leads the industry when it comes to transparency on capital gains. Every month, Vanguard reports on the capital gains status for each of its funds, indicating the level of net profits (or losses) each fund has generated for the year to date. I’m not aware of any other fund company that does this—I applaud Vanguard for it.
Plus, around this time of year, Vanguard also provides additional estimates for what investors can expect to receive from their funds in the way of capital gains.
For tax-smart investors, though, it isn’t enough simply knowing the size of any expected distributions; there are some important dates you need to keep in mind: