So the idea would be to achieve same total gains but lower dividend portion. Let‘s see how this plays out
Interesting.
Seems more likely to be taxed as dividend, unlike the box spread they’re not doing options, right? Just buy/sell around ex-dividend dates? (which the tax office tends to to clearly consider as tax avoidance)
(but worst case you get similar taxation as an ETF that holds the stock all along)
You also need to trust the ETF provider which is not as established as vanguard/blackrock. E.g. I’m not sure what to think about the fact they ended up distributing dividend on BOXX (even if it might be 100% capital gain distribution for us)
1 Like
For me i think it might be a good product for US consumers because there both dividends and capital gains are taxed
For CH, tax office might not appreciate such gimmicks
Although I think it’s an interesting concept. Jury would be out if they actually deliver the results or end up losing out due to some sort of market timing
2 Likes
I think the biggest issue is not technical - but the fact that it is small so you have liquidity/spread issues. I don’t see myself using any of their longer duration products - I’d rather pay the tax and ensure liquidity.
1 Like
This shouldn‘t affect us, as it‘s the fund doing it.
In the SEC filing they are also clear on what the strategy is. They cite research that stocks are overvalued before ex-date and undervalued on/after ex-date. That‘s the main point. Probably just a way to justify the existence of the fund and the SEC not shutting it down, due to the tax avoidance.
If the SEC gives the OK, it‘s all clear.
On BOXX distribution: This was always a possibility and was communicated beforehand. Even then the total distribution was like 0.5%. Considering the yield that‘s still way more tax efficient than t-bills. And actually this might even be beneficial for us, as ictax now has some distribution to classify. The fund running without any distribution might trigger them to invent a virtual dividend.
1 Like
Well, they count synthetic ETFs similar to physical for taxation purpose, right? I think they’re usually pretty pragmatic.
(But the ETF might fly under the radar for a while so unlikely they’d have a closer look)
I mean that‘s something entirely different imo.
With a synthetic fund they purposefully replicate another gross index specifically including dividends.
This is a specialized product with a custom stock strategy. They will also guaranteed not try to replicate an index just without dividends.
How would they even attempt to tax that legally. They literally dont hold the stocks for a certain amount of time where all kinds of price movements could happen, different from the dividends.
The fund also incurs transaction costs etc.
They would literally need to look into every single transaction of every single stock they sell and buy and calculate the relative dividend amount that would be avoided there.
Also I imagine there will still be some very small amount of dividends left and they wont sell every single stock every time before ex-date.
We will see how it fares in the end. First needs some aum. But I‘m very confident that there will be nothing like a virtual dividend for us on the tax side. I just see no way for that.
I think if tax office wants, they can start classifying short term capital gains incurred by such funds as taxable income. Normally in annual reports , there is a clear segmentation of information about dividend income, STCG and LTCG.
Not sure if they would go to this extent though.
The tax treatment would need to be same as for any actively managed fund where multiple trades happen with significant turnover of positions. In the end this strategy is like active management of funds. The tax treatment cannot be different vs actively managed equity funds
1 Like
They would then need to do this for normal funds as well imo. Otherwise it‘s not fair legally.
Also etfs should not have much capital gains anyway, due to in-kind transfers, which AA is pretty good at.
Yes. I agree. They need to be fair and consistent. Just because a fund decided to buy and sell based on dividend payment dates doesn’t mean they need to be taxed differently versus funds that buy/sell whenever they want
1 Like
I don’t know what this means exactly. But this fund should have quite a bit of capital gains / loss because of continuous trading. And eventually ETF holder would also receive those gains, isn’t it?
With in-kind transfers the etf exchanges the holdings with the auhtborized participant against cash. But this is not selling and no gains are realized here. I‘m just not sure to what an extent you can do that with single securities.
That‘s also the main reason why etfs even exists and have advantages over mutual funds in the US. They prevent cap gains distributions when creating/redeeming shares, that can happen with mutual funds.
There is also all kinds of tax magic these funds can do internally to offset gains with losses.
That‘s why basically no stock etf ever has distributions no matter the turnover.
I‘d need to check some of their other funds, like their momentum funds with huge turnover, how they handle it there.
Stuff like that is AAs main selling point though. One of their core businesses is also turning smas/mutual funds into etfs, while being tax efficient.
Also dont get me wrong I don‘t want to sound like shilling for them haha. I‘m personally not even invested yet with them. Just recommended BOXX/CAOS to others so far.
2 Likes
I always thought that capital gains (through buying and selling of underlying stocks) generated by Funds need to be distributed to the shareholders of the funds and ETFs. But seems I don’t fully understand this.
Depends. You can also later offset them with capital losses.
Also you can prevent them in the first place with the in-kind transfers.
Example: A market maker/authorized participant redeems a batch of shares because people sold 1000 shares of fund X.
The AP gives the sellers their cash throigh the broker.
The fund then takes the shares with the most gains on them and transfers those to the AP, and the AP delivers the empty shares back to the fund “destroying” them with them originally containing these stocks.
No gains realized anywhere and shares with lots of capital gains on them not in the fund anymore.
1 Like
AFAIK, it’s even better. Once shares are exchanged by ETF against ETF units, there capital gains are eliminated for the counterparty receiving the shares. See “heartbeat trades”, also in this forum.
1 Like
IMHO, they should’ve picked an obscure name and description. Calling it an “anti-dividend” will make the tax authorities look into it and reclassify with 99% certainty.
I just had a tax savings thought…
So with accumulating ETFs we only pay tax if we own it on a specific payment day that is often only once a year. We can see that date on ICTax.
So couldn’t we just sell before that date and buy a similar ETF immediately after that has a different “dividend” payment date
e.g. Sell SWRD before 31.03. and buy SSAC and then sell SSAC before 30.11. and buy SWRD
Wouldn’t the tax savings of doing this be even better than the typical VT with DA1?
I assume I am missing something
2 Likes
Yes, the “play” would be easily identifiable (since you need to provide all your transactions during the year), and taxed accordingly, or even likely with some penalties for attempting to evade taxes.
1 Like
In principle if you didn’t know why you were making these transactions , this is exactly what would happen and you would be benefited.
The underlying dividend is never paid , so the value of ETF is always growing. Tax office has defined only one day to make it easier for them to tax investors as they simply match the dividend date to year end of the ETF. However the real income is generated throughout the year as underlying companies pay dividend.
Just to keep in mind, the responsibility of paying taxes on income is on investor. Ictax is just making it easier for you to calculate income. In reality, if ICtax didn’t exist, you were supposed to calculate the dividends yourself and report them. In that case you would have had to find out how much dividend was collected by the fund using quarterly reports.
In summary, even though what you are suggesting is technically not illegal, tax office might not appreciate this. This could be seen as abusing the established practice with pure purpose of not paying taxes. And they might simply ask you to declare income from these ETFs separately which these funds generated during your holding period. Calculation would be on you.
Last point -: just because you sold ETF before accounting year end , doesn’t mean your assets didn’t receive dividend income as explained above . So technically speaking you would end up under-reporting your income.
My suggestion -: If you don’t like paying dividend taxes, just buy ETFs which don’t invest in dividend paying companies.
2 Likes
Mmh, I don’t think that’s the function of ICtax (calculating dividends collected by funds from the underlying stocks).
ICtax exactly mirrors the dividend payments by the ETF to the investor (not any underlying payments from holdings to the ETF). Usually 4 payments p.a. for the common US ETFs. If you didn’t want to use the “automatic” ICtax database, you could manually enter the dividend payments received per payment dates based on the transaction reports of your broker account, but one wouldn’t need to scour any fund reports for dividends the fund collected (thousands of payments for VT etc.)