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Dec 21, 2023
As we head into the final stretch of 2023 tax planning and strategies come to the forefront as the 12/31 deadline approaches. And tax costs cannot be ignored. For example, over the past 10 years, the average actively managed large cap mutual fund had a tax cost of 2.12%, more than twice the average expense ratio at 0.85%.1 There are two common ways to potentially lower this tax burden: avoiding capital gains distributions and tax-loss harvesting.
Most fund companies distribute capital gains during year-end, so now is the time to be alert. So, what does this year look like? With more than half of all funds reporting capital gains estimates thus far, here is what the current landscape looks like:
of mutual funds that have reported are expected to distribute capital gains. Gains are often driven by redemptions and active mutual fund outflows have totaled $353bn this year.2 Notably, in each of the past five years, 58% of mutual funds have paid out capital gains distributions, on average.3
is the average capital gains distribution, as a percentage of NAV. 63 funds have reported capital gains distributions over 10% of NAV.
U.S. style-box equity mutual funds are expected to report capital gains distributions this year. Approximately 60% of these funds are large cap funds.4
Unless otherwise noted, all data as of 11.22.2023. Distribution estimates collected from asset managers and compiled and analyzed by BlackRock.
Additionally, tax-loss harvesting provides the opportunity to offset tax costs driven by gains and income.5 Of note:
of Core bond as well as intermediate and long-term municipal bond funds are down over the past three years.6
is the average price return for Core bond funds over the past three years. National municipal (intermediate and long-term) bond funds are also down double digits, posting an average price return of -14.2%.7
To help parse through this data, the BlackRock Tax Evaluator tool compiles capital gains estimates across more than 7,000 funds and helps identify tax-loss harvesting opportunities. By aggregating this information in one place, the tool could save advisors hours while differentiating their practice through a focus on after-tax returns. Use the tool to help maximize after-tax returns, and help clients keep more of what they .
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1 Source: Morningstar, as of Dec. 31, 2022.
2 Source: Morningstar, as of Sept. 30, 2023.
3 Source: Morningstar, as of Dec. 31, 2022.
4 783 mutual funds are expected to pay out capital gains, with 59% of these funds classified under Morningstar’s Large Cap Value, Large Cap Blend, or Large Cap Growth categories
5Source: Source: IRS Topic No. 409 Capital Gains and Losses, as of 10/31/2023. Harvested losses can be used, dollar for dollar, to offset realized capital gains, thereby eliminating tax liabilities. In addition, investors can offset up to $3,000 per year of regular income with realized losses. If an investor recognizes more losses than gains, or has already offset the $3,000 income cap, current rules allow for losses to be carried forward indefinitely.
6 Source: Morningstar, as of Oct. 31, 2023. Past performance is not indicative of future results.
7 Source: Morningstar, as of Oct. 31, 2023. Intermediate and long-term national municipal bond funds are down -14.2% on average, based on 3-year cumulative price returns. Past performance is not indicative of future results.
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This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in this material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.
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