
Tax dialysis: How Vanguard avoids paying realised gains tax on their mutual fund - maest
https://www.bloomberg.com/opinion/articles/2019-05-01/people-want-to-buy-uber-stock#tax-dialysis
======
arkades
So, this is the second front page post by the same user this morning. One
takes a direct shot at vanguard (“tax dialysis”), and the next an indirect
shot (“they don’t use your votes right - but we do! Invest with us!”). The
user only has four posts in their entire history, and three are on the same
topic and posted in the last 24 hours.

This ... looks off to me.

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DennisP
If they want to attack Vanguard they're doing it wrong. My takeaway was that
Vanguard is the place to go for tax-efficient mutual funds.

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JackFr
Matt Levine may be the most clear thinking financial reporter ever.

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C1sc0cat
Not sure why a industry publication is effectively throwing a large part of
its industry under the bus.

Instead of arguing for treating all mutual/etf's REITS and investment
companies in are more sane way - the way the UK does with IT, OIECS and ETF's
- that is the individual owning the shares pays the tax.

~~~
oarsinsync
In the case of mutual funds, the individual investors are all subject to
capital gains (or losses) whenever the fund sells any shares. Even if the
investor hasn’t divested any money from the fund.

This loophole now results in investors only being subject to taxation when
they actually sell their stake in the fund. IE the same way as how ETFs are
designed to work.

Alternatives result in double taxation, which means it’s the investor that
pays twice anyway - the fund will just add the costs of being taxed itself
into the value of the fund, and then the investor will pay a second time when
they divest from the fund.

~~~
mcherm
> This loophole now results in investors only being subject to taxation when
> they actually sell their stake in the fund. IE the same way as how ETFs are
> designed to work.

Your phrasing is slightly misleading. The only reason under tax law that EFTs
are taxed this way is because EFTs have always used this same tax dodge. So
it's not as if Vanguard has patented (and used) a legal loophole for getting
EFT tax treatment on a mutual fund, it is that Vanguard has patented (and
used) the same loophole for their mutual fund that everyone uses for their
EFTs.

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C1sc0cat
Not really a tax dodge its the way investment trusts have worked for over a
hundred years - and they helped build America :-)

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mschuster91
> My only complaint is that Vanguard has patented this method, so nobody else
> can immunize a mutual fund from taxes by bolting on an ETF

What the...? How is that possible, patenting a _tax loophole_?!

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yonkshi
It appears they are using an algorithmic process to perform the heartbeat
trading, and they are patentable[0] as long as they are not illegal. Tax
loopholes are not illegal but very unethical, I think the policy makers share
equal if not more blame for this.

[0] [https://www.quora.com/Is-it-possible-to-patent-an-
algorithm](https://www.quora.com/Is-it-possible-to-patent-an-algorithm)

~~~
6502nerdface
It is possible to patent a “business method,” no algorithm required [1].

Also, TFA addresses the ethics question in this case, and I don’t think it’s
so obviously unethical:

> A lot of middle-class people love investing in ETFs and not paying taxes
> until they sell their shares, and politicians and regulators seem pretty
> happy to let them do it. It is also quite reasonable: People who buy ETFs
> pay taxes on their gains when they sell the ETFs and actually realize the
> gains, which feels like the right time to pay taxes, whereas people who buy
> mutual funds have to pay capital gains taxes at random times that have
> nothing to do with their own investment decisions or cash flows. From that
> perspective, the heartbeat trades are not an evil tax dodge but just a
> sensible mechanical use of the rules to achieve the logical result that
> everyone wants.

[1]
[https://en.m.wikipedia.org/wiki/Business_method_patent](https://en.m.wikipedia.org/wiki/Business_method_patent)

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bregma
The article seems to be misleading. Then again, I'm not a US citizen so I'm
not as familiar with their parochial tax laws.

When one of my mutual funds disposes of an asset at a profit and recognizes a
capital gain it simply retains the earnings and plows them back into some
other capital investment, thus growing the net asset value per share (NAVPS).
When I sell units of the mutual fund, I am subject to capital gains tax (or
can claim a loss) as appropriate. From time to time a fund manager may choose
to pay a distribution classed as a capital gains distribution, in which case
it's income I treat as capital gains on my taxes. No taxes are paid by the
mutual fund and I only pay capital gains tax when I redeem units of the fund.

When one of my ETFs makes a trade of underlying securities and realizes a
capital gain, it's a flow-through situation. What happens is the ETF adds up
all the gains and losses from transactions over the year and at the end of
December I get a special kind of distribution called a "return of capital"
which is like a capital gains distribution on which I need to pay taxes, but I
also add it to my adjusted cost base so I don't get taxed twice and I don't
actually receive any income.

As far as I understand it, that's the way mutual funds and ETFs work in the
USA, too. There's no reason a mutual fund couldn't do flow-through like an ETF
does, other than it would require a greater understanding of basic accounting
so it wouldn't be appropriate for Mom and Pop Sixpack who would probably steer
clear of having to recalculate their ACB on an annualized basis let alone
understand why they need to pay tax on income they haven't received.

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cintezam
Link might be wrong (I got pointed to an Uber article). I think this is the
article: [https://www.bloomberg.com/graphics/2019-vanguard-mutual-
fund...](https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-
dodge/)

~~~
maest
The link was intended to point to one of the article subsections, the one
called Tax Dialysis.

Can't link straight to it, unfortunately.

~~~
GlennS
[https://www.bloomberg.com/opinion/articles/2019-05-01/people...](https://www.bloomberg.com/opinion/articles/2019-05-01/people-
want-to-buy-uber-stock#tax-dialysis)

The way you do this is:

    
    
      1. Press F12 to open developer tools.
      2. Click the select element button (in Firefox, this is the top-left icon of what just popped up).
      3. Click on the header of the section you want.
      4. If you're lucky, it has an id="tax-dialysis" attribute on it.
      5. If not, find a nearby element which does.
      6. Put that id prefixed by an octothorpe (#) symbol at the end of your URL.
      7. Forget that Hacker News isn't markdown, and doesn't do numbered bullets.

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maest
Neat, thanks for the tip. It's too late to edit the post now, but it'll come
in handy in the future.

~~~
GlennS
Glad to be helpful.

I was just thinking that this is really quite a useful feature of HTML, and
browsers should expose it to the user somehow.

Then I found this Firefox extension: [https://addons.mozilla.org/en-
US/firefox/addon/generate-link...](https://addons.mozilla.org/en-
US/firefox/addon/generate-links-for-headers/)

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mrfusion
While we’re on the topic, I’ve never understood how Berkshire Hathaway isn’t
triple taxed.

For example they own gieco. Say gieco makes a profit. Gieco pays a corporate
tax on that profit. Then they send the money to the parent company, brk. Brk
now pays corporate tax (and dividend tax?) on that same money?

