America's Fund Companies Argue Proposed Tax Change Will Cost Investors
15 November 2017 - 4:44AM
Dow Jones News
By Laura Saunders
Some of the largest fund companies in the country are pushing
back against a little-noticed provision in the Senate tax bill they
argue will cost investors millions.
The provision would prevent investors from minimizing taxes by
choosing the specific shares that are being sold when they sell
part of a position. Instead, investors would have to sell their
oldest shares first.
If the provision becomes law, "markets will work less well. Our
fund managers will have their hands tied, and our shareholders will
owe more in taxes," said Thomas Faust, chief executive of Eaton
Vance Corp., a fund firm that manages more than $419 billion.
The provision included in the Senate bill requires investors who
are selling partial positions to assume that lots of securities
bought at different prices are sold on a "first-in, first-out"
(FIFO) basis. The provision would affect "passive" index funds and
exchange-traded funds, as well as actively managed ones.
"Vanguard is concerned with language that requires funds to sell
their oldest shares first -- mostly likely increasing significantly
the amount of taxable distributions made to investors every year,"
a Vanguard spokeswoman said in a statement.
Here's how the provision works: Say an investor owns two lots of
one stock bought at different prices, and they are held in a
taxable account rather than a tax-deferred retirement account. If
the stock is trading at $100 now, each share acquired five years
ago for $60 would have a $40 taxable gain.
But each share bought two years ago at $110 would have a $10
loss.
Current law allows investors, including fund managers, to choose
which shares they part with. So selling shares bought for $110
would yield a loss that could offset other gains, while selling
shares bought for $60 would produce a taxable gain.
If the provision takes effect, the first shares sold would be
deemed to have a cost of $60 each, and an investor couldn't sell
the $110 shares until all $60 shares were gone. The change would
take effect for sales in 2018. It is estimated to raise $2.7
billion over 10 years.
Supporters of the change say it would simplify a complex
record-keeping issue. "Having all these choices is harmful to
taxpayers and to the tax system," says Steven Rosenthal, a tax
attorney now with the Tax Policy Center. The summary does contain
language that seems to allow fund investors using "average cost" to
continue. The wording of the statute isn't yet available.
The proposed change would affect individual investors who have
taxable accounts and holdings of one security bought at different
times as well as funds.
The provision would make it more difficult for investors to
"harvest" losses by selling specific shares that have gone down in
value. Many investors consult their adviser's annually about such
sales.
It would also affect taxpayers' ability to maximize the value of
charitable donations of appreciated securities.
Under current law, taxpayers often don't owe long-term
capital-gains tax on shares they donate while getting a deduction
for their full market value. The best shares to give may not be the
oldest shares they acquired.
"People who want to maximize tax savings by donating specific
lots that aren't their oldest ones should do it before year-end,"
says Robert Gordon of Twenty-First Securities, a tax strategist in
New York
Write to Laura Saunders at laura.saunders@wsj.com
(END) Dow Jones Newswires
November 14, 2017 12:29 ET (17:29 GMT)
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