ETF (HACK) capital gains when fund has gone backwards?

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  bemybubble on 28/10/2022 - 13:50

  +5

  The tax summary shows the capital gains made within HACK itself. That's the distinction.

  • 

    Danam on 28/10/2022 - 14:01

    I can appreciate they may have made capital gains with some of the underlying assets, but would you not expect these to be offset in some way against the assets that lost value?

    Or is it perhaps a case of having some realised capital gains and much greater unrealised capital loses?

    • 

      bemybubble on 28/10/2022 - 14:08

      No as one has to do with you as a physical unitholder - one has to do with the entity you have bought units in investing in other entities.

      • 

        Danam on 28/10/2022 - 14:13

        I appreciate the help in making me understand this. Can you think of an example of how an underlying ETF can incur a positive Capital Gain when the assets it holds go backwards?

        • 

          bemybubble on 28/10/2022 - 14:16

          +10

          @Danam: Sure

          ETF sold equities in July of 2021 (being the 2022 FY). They sold them at a high so there was a positive cap gain. However come June 2022 all remaining equities have tanked but haven't been realised (i.e. not sold). So the value of your portfolio also goes backwards.

          • 

            Danam on 28/10/2022 - 14:25

            +1

            @bemybubble: Makes complete sense. Thanks again.

            • 

              bemybubble on 28/10/2022 - 14:25

              @Danam: Gamble responsibly my friend ;)

              • 

                Danam on 28/10/2022 - 18:28

                @bemybubble: If I can ask another newbie tax question while you're in a helping mood.

                If my annual tax summary says:

                18A - Net Capital Gain (Discounted Capital Gains NTAP) = $100
                18H - Total Current Year Capital Gain = $200

                but I had only purchased my first shares in that ETF within that financial year, do I override the prefilled 18A value with the value that is in 18H because I don't yet qualify for the CGT discount? OR do I leave those values as they are prefilled and only think about the CGT discount when I trigger a capital gains event through selling the shares?

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                  bemybubble on 28/10/2022 - 18:34

                  +1

                  @Danam: Leave those values. As I mentioned it’s HACK that made the gain. They would have held the equities >12 months

                  • 

                    Danam on 28/10/2022 - 18:57

                    @bemybubble: I was 50/50 about that being the case. It's good to know I'm not just guessing leaving those values as they are in the tax summary.

                    Much appreciated.

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  MrMarket on 29/10/2022 - 07:38

  The way most ETFs works is they will rebalance every so often based on the index they track when the index tracker (MSCI or S&P etc..) releases their index list.

  any capital gain they made it will get recorded and ditch out as distribution along with any dividend they received, depending when you buy and hold the shares that when you get the distribution, the tax summary covered the whole year and most ETFs that track US stocks only pay distribution once a year.

  ETFs going up and down from month to month is just the way it tracks the underlying asset it got nothing to do with distribution
  distribution is either from dividend and/or capital gain result of rebalancing

  • 

    Danam on 29/10/2022 - 11:52

    Hey, thanks for taking the time to share that insight.

    For my example ETF (HACK), the index went up the first half of the financial year, then down the second half. I purchased my units just as things were headed south. Are you saying that the capital gain reported on the annual tax summary is reflective of the fund's capital gains over the entire financial year, rather than tailored to the period that I held the units for?

    • 

      MrMarket on 30/10/2022 - 21:42

      I just going through some HACK ETFs paperwork, you should get 2 statements with HACKS
      one is the distribution payment statement this is the actual amount you get on how many units you hold paid into your bank account then you get a yearly tax statement covered the whole financial year 01/07 - 30/06
      the end of year tax statement there is a net cash distribution column that should match your distribution statement

      yes, the capital gain on the tax statement covered the entire year, but I think that just more for fund reporting, what you declare is the actual distribution you are getting into your bank account, to be honest I don't deal with this stuff personally
      because you got to break down what involve in this distribution on the tax form, I paid an accountant to do all this
      each year my accountant just asks for these 2 statements and he sort out the rest.

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  MrMarket on 29/10/2022 - 07:49

  "Can anyone tell me how the fund has a positive capital gain. Do they not offset any gains against the much greater losses?"

  this is the works of the ETFs manager; they rebalance the stocks they hold according to the index maker list, capital gain and loss is internal recorded by ETFs manager and you just get the report, there is no need to concern about the mechanics underneath it, it highly regulated industry and everything they put on that end of year report is above board.

  if you hold individual stocks, every so often you get an announcement from them they either get removed from an index or added into the index
  that when the ETFs manager need to start rebalancing the index based on that list (capital loss/gain) will get recorded during this period.

  • 

    dcep on 29/10/2022 - 15:29

    does that mean when we buy ETF , we don't get taxed based on our gain/loss from buy/sell price , but rather the underlying buy/sell holdings the ETF executed within?

    • 

      MrMarket on 30/10/2022 - 21:12

      +1

      no ETFs treatment are the same as shares and other asset you still pay capital gain if you make money out of it
      so, if you buy XXXX ETF for a $1 and sell them for $1.20 you made a gain of 20c and you got to pay tax on it

      this is to do with distribution that you get each year by holding ETFs and never sell , these distributions are complex as it has hundreds of shares dividends with different tax treatments and or capital gain from rebalancing. But you don't have to worry about that, you just get a tax report to do your tax and they do all the handwork for you

      ETFs don't actively engage in selecting what shares to buy and sell, it just follows set rules of index rebalancing
      and the index composition is done by a third party like S&P or MSCI.

      So, when S&P or MSCI release an index said these are the shares in them, ETFs manager have to sell share that no longer in the index and buy the one that are in the index and or reduce/add some other shareholding for weighting.

      there are active ETFs and these ETFs are more like fund managers, they try to beat the market by actively engaged in what to buy and sell
      but all broad index tracking ETFs are passive, they just follow index rebalancing rules and that is it

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  MITM on 31/10/2022 - 15:12

  I would have thought a distribution or dividend paid to you from your EFT would add to your income and thus income tax is payable on this taxable earning.
  The fact the EFT unit price goes up and/or down and is rebalanced etc has nothing to do with reporting a capital gain or loss, unless you make a capital gains event ie sell your units for a profit or loss. If you held them for more than 12 months before selling, you would apply the 50% CGT reduction.
  Question is: If you buy units at different times and for different prices, and you sell some units, then which units do you report as sold, the oldest or the newest ?
  With property, if you have 3 rental apartments and you sell 1, you choose which to sell, the oldest, the last one you bought or the one you bought in between.

  • 

    trashcan on 31/10/2022 - 15:33

    If you buy units at different times and for different prices, and you sell some units, then which units do you report as sold, the oldest or the newest ?

    You have complete discretion to offset your sale against any of the parcels (purchases made on different date/price) that you held on the date of sale.

  • 

    MrMarket on 01/11/2022 - 07:50

    Under the law you can select what parcel to sell to minimise or maximise capital gain/loss as long as you got record to show it
    say you bought a parcel of 100 shares at $1 and another 100 shares at $1.10 a few months later

    a few weeks later you want to sell 100 shares at $1.20 you can elect to sell $1.10 parcel you bought to minimise your capital gain
    a year later you sell another 100 shares at $1.50, you entitled to 50% CGT discount on the $1 parcel as it held > 12 months