RetireJapan

Hi all, first-time poster here.

I'm contemplating buying the covered-call etf QYLD. In the states, I hear that its "dividends" are treated as a return on capital.
Which gives it some beneficial characteristics that are different from normal dividends issued by companies.

Does anybody know what the situation for Japan is?

Not sure about taxes here, but I don't care for the chart--this is vs the S&P500.

@Captinspoke
It's not for capital appreciation. It pays a stable "dividend" by selling call options on its holdings. Once you take into account its "dividends" and them being reinvested it'll look completely different. Hence, you have to look at it from a different perspective from the normal "buy & hold" strategy.

@OkLah!
Wouldn't the normal withholding tax be higher on dividends? If so, does that mean your expecting it'll be a lower tax rate because of its special situation?

I hear that its "dividends" are treated as a return on capital.

I do not think that is true. If anything the advice to US investors is to hold a covered call ETF like this in a tax sheltered account because the tax treatment can be quite unfavorable. See this link which explains the most common scenario is that dividends are likely to be treated as short-term capital gains (i.e. the worst treatment):

https://www.globalxetfs.com/content/fil ... Primer.pdf

The more important issue from my point is the same one mentioned by captainspoke. This ETF underperforms index funds based on the stocks upon which the covered call strategy is based. It's a good example of the principle that investors almost always give up total return when they look for instruments that produce high monthly or quarterly dividends.

Daniel wrote: ↑Tue Jun 01, 2021 12:39 pm @Captinspoke
It's not for capital appreciation. It pays a stable "dividend" by selling call options on its holdings. Once you take into account its "dividends" and them being reinvested it'll look completely different. Hence, you have to look at it from a different perspective from the normal "buy & hold" strategy.

@OkLah!
Wouldn't the normal withholding tax be higher on dividends? If so, does that mean your expecting it'll be a lower tax rate because of its special situation?

You can check the total return which would be achieved with dividends reinvested at this website:

https://www.buyupside.com/stockreturnca ... cinput.php

If you compare QYLD to VTI (total US stock market) you will see how far it lags in total return for the market as a whole. Because QYLD is actually based on the NASDAQ 100 which has outperformed VTI over the last decade or so, it's even more accurate to compare QYLD to QQQ and that shows that QYLD has less than half the return (depending on the time frame 8-9%/year compared to a 20% annualized return for QQQ).

TokyoWart wrote: ↑Tue Jun 01, 2021 1:26 pm -snip-

While I'm glad you expressed your opinion, a covered call strategy has its advantages and shouldn't be ignored because it "underperforms." The strategy has its own advantages that make me interested in it. Everyone has a different investment strategy and what fits me may not fit others.

Overall though, I'm currently most interested in the tax treatment for Japan.

Also, I had found the proper term for the dividend paid with QYLD. It is called a capital dividend (aka, Return on Capital) and it reduces the cost basis in the states. My question is does this extend to Japan with the QYLD dividend...

You might want to also ask on the r/JapanFinance board on Reddit: https://www.reddit.com/r/JapanFinance/

Daniel wrote: ↑Wed Jun 02, 2021 10:27 am...
Also, I had found the proper term for the dividend paid with QYLD. It is called a capital dividend (aka, Return on Capital) and it reduces the cost basis in the states. My question is does this extend to Japan with the QYLD dividend...

I think that's Return of Capital. It varies, but closed end funds (CEFs) sometimes make this kind of distribution--some more often (and a higher proportion of their distribution), others only sometimes/occasionally.

The attachment below shows that QYLD does not pay out a return of capital--it's all income (note the column headings, ROC is zero). And I can't put it all in a screen shot, but that page shows that QLYD's distributions are exclusively income, going back to 2014.

Secondarily, I don't buy things that have such low volume. I like to see a few hundred thousand shares/day, at least, and a million or more makes things feel more comfortable.

OkLah! wrote: ↑Wed Jun 02, 2021 11:20 am Average daily volume is around 2mio shares.

Yes, you're correct. I'm not sure why in that attachment it says 1,035 -- the screenshot is from a few minutes before I posted it, so maybe pre-market?

Also, I had found the proper term for the dividend paid with QYLD. It is called a capital dividend (aka, Return on Capital) and it reduces the cost basis in the states. My question is does this extend to Japan with the QYLD dividend...

This link gives the monthly reports of how much of the distributions count as return of capital vs short term gains vs long term gains vs investment income (click on the 19A forms):
https://www.globalxetfs.com/tax-supplements/#qyld

Return of capital is a higher proportion recently (98% in April 2021) but is much lower around 2017 (around 50%) or 2016 (around 25%). I don't think it's correct to say that all of the QYLD distributions are return of capital.

It is not exactly the same situation but I have had return of capital as part of the distributions I received during corporate divestments and takeovers for shares I owned and it seems like that was not included in taxable dividend income because my accountants in Japan are using the 1099-DIV forms I receive from my brokerages to report dividend income and return of capital is not counted in box 1a. In the discussions I have had with my accountants and the tax office on the 1099 form it seems like they only care about 1a for total dividend income and sometimes box 7 for foreign taxes paid (in addition to US taxes).

You also asked about whether it reduces your cost basis in Japan (which increases your taxes at sale). If you use the 1099-B to report the sale of securities from a US brokerage they are required to track cost basis and include it in the reporting of your capital gain/loss so I would assume that flows through to Japan if you use the 1099 as the reporting document.