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some bond funds your credited with the interest every day so when ever you sell you get it.
others you get interest when it goes ex dividend. if you sell before you get a higher share price and no interest payment or if you sell after you have a taxable interest payment and a lower share price.
buying in is when you want to avoid buying before an interest payment. selling wont matter much. its pretty much the same deal tax wise either way when you sell..
Thanks. But in the scenario where the fund has been held over a year, then if selling before dividend distribution, the gains will be taxed as long term (lower tax rate than ordinary income), so wouldn't it be a little better than selling after distribution? is this reasoning correct?
no , funds have different types of distributions . an interest payment is taxed at regular rates . a fund that increased in value becaue of a pending interest rate payment also is taxed at regular rates and not capital gains rates.
its like buying an after market bond. there is no tax advantage buying a bond with a lower coupon rate and paying less than par for it as opposed to buying one with a higher coupon rate and paying more than par .
its not an interest payment one way and a capital gain the other.
... if selling before dividend distribution, the gains will be taxed as long term ... so wouldn't it
be a little better than selling after distribution? is this reasoning correct?
I would assume the fund will send you a statement - telling you what is what.
If it is held through a brokerage, then the brokerage will do that. It's best to sell an asset when you think the time is right.
Quote:
Originally Posted by mathjak107
its like buying an after market bond. there is no tax advantage buying a bond with a lower coupon rate and paying less than par for it as opposed to buying one with a higher coupon rate and paying more than par .
its not an interest payment one way and a capital gain the other.
What if you buy a bond at 0.8?
Say you pay $8,000 for $10,000 par? You are going to have a cap gain when they are redeemed of $2k.
Suppose they sell fof $12k sometime during the holding period. Then you have a $4k gain. This has happened a lot.
You are also only taxed for the interest income on the coupon payment.
If you bought at a discount ( ie. the $8k buy above ) you are getting a coupon rate that is lower than the
going rate so some of your interest income essentially gets taxed as long-term capital gain instead of as interest.
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Of course, none of this is relevant to a bond fund.
you have two situations when you buy a bond. you have the issue of holding until maturity or not holding until maturity.
if you hold until maturity then the bond has no capital gains ,its all interest payments.
you may have bought the bond at a discount to face value to bring the interest rate up if rates on new bonds are higher but you will only get the face value at maturity. at maturity there is no capital gain or loss regardless of the discount or premium you paid. if you got 1,000 back but paid 800 its still figured as interest at maturity.
bond capital gains are based on your cost basis. there are special definitions as to what constitutes cost basis.
Current tax law equates the basis to the present value of future coupons and the principal, with the bond’s yield to maturity at purchase serving as the discount rate.
if you sell early then as long as you held longer than a year its a capital gain or loss and gets favored tax rates. under a year its still a capital gain but its regular tax rates.
the calculations and rules can really hurt your hair.
You betcha, but what if you are grandma and grandpa and want some income?
Yields on 10-years bonds might go below 1%. That would produce more nice gains.
I'm not betting on it, but I wouldn't be the least bit surprised.
If you want to put several hundred thousand dollars to work producing
income to live on, you have to go with the dividend-paying stocks now.
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