Join Dave Nadig as he dives deep into the complex world of ETF tax strategies with expert Brent Sullivan from Tax Alpha Insider. In this illuminating conversation, they break down the often misunderstood concept of "return of capital" distributions in ETFs and how these can impact your investment strategy and tax planning.
## Key Topics Covered:
- What return of capital actually means and how it works in different market conditions
- The origin of return of capital in Master Limited Partnership (MLP) ETFs
- How modern buy-write and covered call strategies utilize return of capital
- Tax implications when your cost basis reaches zero
- Potential downsides and risks of aggressive return of capital strategies
- How ETF sponsors manufacture return of capital through tax-loss harvesting
- The difference between capital gains and ordinary income in distribution planning
- What investors should track and monitor when investing in these products
- How to find reliable information about an ETF's distribution characterization
Follow Brent Sullivan on LinkedIn or visit taxalphainsider.com for more expert tax and investment insights.
0:30 - Basic explanation of return of capital: "A tax-free distribution with two situations - up market and down market"
1:45 - How return of capital impacts cost basis and tracking requirements
2:15 - Original use case: MLP ETFs and the role of depreciation, depletion, and amortization
3:30 - How MLPs effectively use "paper losses" while actually generating income
4:30 - Modern applications: Covered call and buy-write strategies using return of capital
6:00 - Understanding RIC status and distribution requirements
8:15 - What happens when you run out of basis: "Every subsequent return of capital becomes capital gains"
9:45 - The "only magic in tax strategy": Step-up in basis and legitimate estate planning uses
11:15 - Manufacturing return of capital: Harvesting losses to offset gains
14:00 - The "marshmallow test": Trading upside potential for current income
16:30 - "Extracting basis from the portfolio is just like, what? You can do that."
17:15 - Why return of capital is "sort of remarkable" and unlike anything else in investment management
18:15 - The next frontier: ETF sponsors marketing tax loss harvesting to manufacture return of capital
22:30 - The 19a-1 notice: How to track return of capital in your investments
24:15 - A typical scenario over three years showing how return of capital flows work
27:00 - Due diligence requirements: "You need to pay attention to who's running these products"
28:15 - Closing thoughts and where to find Brent Sullivan (Tax Alpha Insider)
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