Vanguard Tax-Managed Capital Appreciation Fund tax distributions

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Table 1. Summary
Fund Distributions.jpg Favorable tax factors Fund Distributions.jpg Unfavorable tax factors

Historical gains distributions : None
Dividends: Low
Qualified dividends: Yes (avg. 100%)
Turnover: Very low
Stock Migration: Low

ETF shares : No

The Vanguard Tax-Managed Capital Appreciation Fund is a very suitable candidate for placement in taxable accounts. The fund is specifically designed for taxable accounts (the fund is not eligible in IRA accounts.) The fund tracks the Russell 1000 index of US large and mid cap company stocks. The fund also tilts towards lower dividend distributing companies within the index.

The following tables provide long term data on the fund's history of both dividend and capital gains distributions. The first table also provides the historical distribution of qualified dividends.

The second table provides a database of the fund's accounting figures: the annual level of realized and distributed gains; its level of unrealized gains and loss carryforwards; as well as the annual in-kind redemption gains the fund has realized. These figures highlight the level of a fund's tax liabilities.

Because both manager turnover of securities inside the portfolio and investor turnover of fund shares can affect the level of gains realization, a third table provides historical turnover ratios.

Distributions

The following table provides a view of the fund's historical distributions expressed in terms of yields. We can see that the fund has not distributed a capital gain since its inception in 1994. The fund has distributed 100% qualified dividends, which under the current tax regime, are taxed at lower capital gains tax rates.

Vanguard Tax-Managed Capital Appreciation Fund Tax Distributions
Year Dividend Investor shares [1] Dividend Admiral shares [1] Short-term Capital Gains [2] Long-term Capital Gains [2] Qualifying Dividends[3] (FY) Annual Return - Investor [4]
2010 1.51% 1.59% 0.00% 0.00% 100.00% 15.94%
2009 1.74% 1.80% 0.00% 0.00% 100.00% 29.03%
2008 1.66% 1.72% 0.00% 0.00% 100.00% -37.63%
2007 1.51% 1.57% 0.00% 0.00% 100.00% 6.07%
2006 1.51% 1.56% 0.00% 0.00% 100.00% 14.40%
2005 1.25% 1.29% 0.00% 0.00% 100.00% 7.49%
2004 1.40% 1.47% 0.00% 0.00% 100.00% 11.75%
2003 1.09% 1.16% 0.00% 0.00% n/a 31.72%
2002 0.87% 0.95% 0.00% 0.00% n/a -23.45%
2001 0.60% 0.79% 0.00% 0.00% n/a -15.34%
2000 0.36% - 0.00% 0.00% n/a -10.13%
1999 0.47% - 0.00% 0.00% n/a 33.50%
1998 0.62% - 0.00% 0.00% n/a 27.95%
1997 0.70% - 0.00% 0.00% n/a 27.29%
1996 0.91% - 0.00% 0.00% n/a 20.92%
1995 0.97% - 0.00% 0.00% n/ 34.38%
1994 1.26% - 0.00% 0.00% n/a -0.50%

Accounting statistics

The accounting figures and associated ratios (tables 3 and 4) can help one visualize some of the major determinants of a fund’s tendency to distribute taxable gains. These determining features include:

Turnover: The rate at which a fund manager sells securities within the fund has a major effect on potential gains realization. Single digit annual fund turnover percentages result in a low rate of realized gains. Similarly, fund shareholders' sales flows have major effects on a fund’s distribution tendencies. Net flows into the fund have the following effects:

  1. Constant inflows allow a fund manager to purchase a wide range of price lots for shares. The manager can select high basis shares when forced to sell a stock (this may realize a loss). The manager can also select low basis shares when redeeming a stock in-kind (a non-taxable transaction that can remove an unrealized gain out of the portfolio.) This redemption technique is primarily employed with institutional creation and redemption of ETF shares. [5] Net inflows mean that shareholders are not forcing the manager to liquidate assets (and realize gains or losses) in order to meet redemptions. Large outflows can force such liquidation.
  2. A large and growing net asset base serves to diffuse any realized capital gains across a large base of shareholders and reduces the per share gain distribution. Large outflows have the opposite effect; any gains realized are spread across a smaller asset base and result in higher per share distributed gains. [6]

The level of unrealized gains and carryover realized losses in a fund: Index funds defer gains realization and often accumulate significant unrealized appreciation, which if distributed, would be taxed; thus the unrealized gain/loss figure shows the potential gain (or loss) that would be realized if the portfolio was to be entirely liquidated. Any loss carryovers a fund possesses can be used to offset future realized gains (carryovers have an eight year expiration period).


Template:Definition of Terms

Turnover

Reference article: Average net assets


Table 4.

Template:Definition of Turnover Terms

Tax rates

Mutual fund distributions will be taxed according to the tax laws governing the investment over the holding period of the investment, which are subject to change. The actual tax imposed will depend upon each individual's tax rate and the timing of purchases and sales. The federal tax rates applicable to mutual fund distributions and investor sales of securities for the period 2008 - 2012 are outlined below. Keep in mind that investment income may also be subject to state and local taxation.

  1. Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates up to 35%. Mutual fund short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
  2. Long-term capital gains distributions are made from realized gains on securities held for more than one year. Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets and at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets. (These tax rates are mandated for 2008-2012.) They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.
  3. Qualified dividends are the ordinary dividends [7] that are subject to the same 0% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive. Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 0% rate.
  4. When you sell at a loss you will either offset capital gains which would have otherwise been taxed at your capital gains rate or you will offset income (up to $3,000 maximum per year) which would have otherwise been taxed at your marginal income tax rate, or both. If you offset capital gains that would have otherwise not been taxed at all (because your capital gains tax rate is 0%) then this part of the tax loss harvest may be an outright loss.
Table 5. Federal Capital Gains and Dividend Taxation in the United States from 2008 forward[8]
2008 - 2012 2013 -
Ordinary Income Tax Rate Short-term Capital Gains
Tax Rate
Long-term Capital Gains
Tax Rate
Ordinary Dividends
Tax Rate
Qualified Dividends
Tax Rate
Ordinary Income Tax Rate Short-term Capital Gains
Tax Rate
Long-term Capital Gains
Tax Rate
Ordinary Dividends
Tax Rate
10% 10% 0% 10% 0% 15% 15% 10% 15%
15% 15% 0% 15% 0% 28% 28% 20% 28%
25% 25% 15% 25% 15% 31% 31% 20% 31%
28% 28% 15% 28% 15% 36% 36% 20% 36%
33% 33% 15% 33% 15% 39.6% 39.6% 20% 39.6%
35% 35% 15% 35% 15%


Tax analysis

As a tax-managed fund, the Vanguard Tax-Managed Capital Appreciation fund has not distributed a capital gain since inception and has provided 100% qualified dividend distributions since the establishment of this tax preference.

The annual fund accounting figures show that the fund has provided average single digit turnover rates (excepting a 26% turnover rate in 2009) over the 1994-2010 period. This low turnover can be attributed to the fact that stock migration out of a large cap index (in this instance, the S&P 500 index) can come in the following dimensions:

  1. An individual company becomes relatively smaller and migrates to a mid cap index;
  2. An individual company is bought out or merged with a second company.

The fund has recorded net redemption in 2009-2010. Shareholder redemption has recently gravitated around 10%, suggesting an average shareholder holding period between 3 of 10 years. One should note however, that shareholder redemption spiked upwards in FY 2005 (35%) and FY 2001 (41%). The fund has realized net losses in a plurality of years since inception, and has always maintained a loss carryover reserve to offset realized gains. The fund used a substantial portion of its carryover loss reserve in FY 2008, which has reduced the available carryover for subsequent years.


The following table presents the federal tax cost on the fund's historical distributions (see second tab, table 6.) under two scenarios: the current favorable tax rate regime (2010-2012) and under a higher tax regime (with dividends taxed at marginal rates and long term capital gains taxed at a maximum 20%). Keep in mind that distributions can also be subject to state and local taxation, with marginal rates ranging from 0% to 10.3% (an average 5% state tax rate will add an approximate 0.08% to the annual tax cost of holding the fund.) The average is based on the results from 2004-2010, the period comprising the qualified dividend tax regime. The average 1.51% dividend yield over this period is somewhat higher than the 1.08% average over the 1994-2010 period.

The table does not include the capital gains cost associated with selling the fund at a gain. [9]


Table 6.


See also

References

  1. 1.0 1.1 Dividend data is derived from the EDGAR annual reports database N-CSR reports back to 2003; N-30D reports back to 1995.
  2. 2.0 2.1 Capital Gains are derived from annual reports, and are calculated by dividing the dollar amount capital gain distribution by the average net assets of the fund, derived from NSAR reports. Cite error: Invalid <ref> tag; name "NSAR" defined multiple times with different content
  3. Data derived from Vanguard site.
  4. data derived from annual reports.
  5. When a fund redeems ETF shares, it prepares a basket of securities that it exchanges in-kind to an institutional investor. The basket often includes a modest cash component for exact settlement. An astute ETF manager can use this as an opportunity to raise cash by selling some high basis stock for a realized loss.
  6. Larry E. Swedroe, What Wall Street Doesn’t Want You To Know, 2001, pp.227-28. ISBN 0312335725
  7. Fairmark says:

    A portion of your ordinary dividend may be nonqualified because it can include items like these:

    • Taxable interest. When a mutual fund receives taxable interest, the income gets paid out as a dividend. It's a dividend when it goes out of the mutual fund, but it wasn't a dividend when it came into the mutual fund, so it can't be a qualified dividend.
    • Nonqualified dividends. Your mutual fund may receive dividends that are nonqualified. For example, the mutual fund may sell shares just 35 days after buying them, but after receiving a dividend. The mutual fund has to hold the shares at least 61 days to have a qualified dividend. Any amount the mutual fund receives as a nonqualified dividend gets paid to you as a nonqualified dividend.
    • Short-term capital gain. When a mutual fund has a short-term capital gain, it pays this amount to the mutual fund shareholders as an ordinary dividend.
    • Holding mutual fund shares less than 61 days. You should also be aware that any dividend you receive on mutual fund shares held less than 61 days is a nonqualified dividend, even if the mutual fund reports that amount to you as a qualified dividend. You don't have to buy the shares 61 days before the dividend is paid, but the total amount of time you hold the shares (including time before and after the dividend) has to be at least 61 days.
  8. Almost all of the dividends distributed by Equity REITS come in the form of non-qualified dividends. Non-qualified dividends are taxed at marginal income tax rates.

  9. Federal Capital Gains Tax Rates, 1988-2011
  10. This table indicates the additional cost for the capital-gains tax when you sell, assuming that you pay taxes on the distribution and reinvest the after-tax portion of the distribution; since it is a one-time cost, the effect is annualized. For example, if you hold an investment for 30 years and lose 10% to taxes when you sell, that is equivalent to losing 0.35% every year. Thus, if you sell the fund, your cost will be the sum of the Table 6 and Table 7 costs. However, you would not pay the Table 7 cost on any stock which you either leave to your heirs or donate to charity, and thus may not pay that cost on your full investment. In particular, you might estimate your total tax cost by using the low-return line in Table 7; if stock returns are high, you will have a large taxable account and will reduce the tax cost by taking longer to deplete it or by not spending it all during your lifetime. Taxes are computed at a tax rate of 15% on long-term gains (except in the "rate rises to 20% column", which applies if that tax reduction is allowed to expire), and on qualified dividends (except in the "no QDI" column, which applies if the tax reduction on qualified dividends expires and the rate is 35%). Although not tabulated, keep in mind that investors in the lower tax brackets (15% or lower) pay lower federal tax rates on investment income for the period 2003 - 2012, and reap higher after-tax returns, outside of tax-exempt municipal bonds, in all asset classes.
    Table 7. Additional hypothetical tax costs (after taxable funds are sold)
    Fund Pre-tax Returns Distributions Tax Cost Annualized cost over 10 years Annualized cost over 20 years Annualized cost over 30 years 30-year cost if CG tax rate rises to 20%
    Any bond any all any 0.00% 0.00% 0.00% 0.00%
    Tax-efficient stock, low returns 5.00% 2.00% 0.30% 0.36% 0.30% 0.25% 0.33%
    Tax-efficient stock, medium returns 8.00% 2.00% 0.30% 0.63% 0.47% 0.37% 0.50%
    Tax-efficient stock, high returns 11.00% 2.00% 0.30% 0.84% 0.58% 0.43% 0.58%
    Tax-inefficient stock, low returns 5.00% 4.00% 1.00% 0.12% 0.10% 0.09% 0.12%
    Tax-inefficient stock, medium returns 8.00% 4.00% 1.00% 0.43% 0.33% 0.26% 0.35%
    Tax-inefficient stock, high returns 11.00% 4.00% 1.00% 0.66% 0.47% 0.35% 0.47%

External links

Qualified Dividend Income (QDI)

Template:Vanguard Fund Distributions