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How To Record Notional, Or Phantom, Distributions

IDIC

Hello All;

Several of my Vanguard ETFs have had notional distributions and I need to adjust my book value accordingly in Quicken. How do I do this?

Thank you;

Bill

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Accepted answers

Tom Young

The accounting here is:

Debit (increase) cost basis of investment

Credit (increase) realized capital gains

This is tricky to do in Quicken. You can do a return of capital transaction using a NEGATIVE dollar amount. That increases your basis without adjusting your shares and reduces the cash in the Account. Then record a capital gains distribution for the same amount. Result: Capital gain recognized, cash not affected, basis increased.

I'm always leery or using return of capital transactions, especially repeatedly, as my personal experience, (and the experience of other users), is that multiple return of capital transactions can produce some strange results in the Account.

I think this is a Canadian thing, (though I'm not sure), so if there are "rules" as to how the phantom distribution is to be accounted for at the "lot" level, (e.g., FIFO, LIFO, lots bought in the year of the phantom distribution, etc.), then it would be safer to Remove the lot or lots that are affected and then do Adds to put those lots back in the Account with their higher basis.

IDIC

Tom Young said:

The accounting here is:

Debit (increase) cost basis of investment
Credit (increase) realized capital gains

This is tricky to do in Quicken. You can do a return of capital transaction using a NEGATIVE dollar amount. That increases your basis without adjusting your shares and reduces the cash in the Account. Then record a capital gains distribution for the same amount. Result: Capital gain recognized, cash not affected, basis increased.

I'm always leery or using return of capital transactions, especially repeatedly, as my personal experience, (and the experience of other users), is that multiple return of capital transactions can produce some strange results in the Account.

I think this is a Canadian thing, (though I'm not sure), so if there are "rules" as to how the phantom distribution is to be accounted for at the "lot" level, (e.g., FIFO, LIFO, lots bought in the year of the phantom distribution, etc.), then it would be safer to Remove the lot or lots that are affected and then do Adds to put those lots back in the Account with their higher basis.

Thank you for the suggestion, but again Quicken changes the minus sign to a positive when I attempt a return of capital transaction. I found another thread in which it is said that in the past Quicken did allow for negative amounts under somewhat similar circumstances, but not any longer. I looked through the suggestions there, but I don't believe they can be applied to my situation.

https://community.quicken.com/discussion/7850377/how-do-i-enter-a-negative-amount-for-a-dividend-the-minus-sign-doesnt-work-anymore

IDIC

Deepwater said:

For both RoC and Reinvested (Phantom) Distributions I use a Return of Capital transaction and set the transfer account to the same as the account the RoC or Phantom Distribution was posted to. This eliminates the need for a Misc transaction to correct the cash balance.

I posted a screen print of a sample transaction on another forum. Note that the screen print is for a RoC transaction (positive $ value). I have not had a problem entering a negative value for the amount for Phantom Distributions.

https://www.financialwisdomforum.org/forum/viewtopic.php?f=32&t=121849&p=635305#p635303

www.AdjustedCostBase.ca is a good free tool for tracking cost basis. Here is their help guide for Phantom Distributions:
https://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/

It is important to adjust your cost base for these transactions since they are taxed in the year received (will be on a T3 slip). If you don't increase your cost base by the amount of the Phantom Distribution you will be double taxed when you sell shares.

Here are 2 more articles in the Globe and Mail
https://www.theglobeandmail.com/globe-investor/investor-education/haunted-by-phantom-etf-distributions/article18225076/

https://www.theglobeandmail.com/investing/education/article-taming-your-etfs-phantom-menace/

Thank you very much for the URL to the screen shot and the information provided. As best I can tell my online broker (RBC DI), has updated the Cost Basis properly, although I will be prepared for next year's tax return.

Although with your and other's assistance I am now able to include the distribution using an RoC transaction, I am unable to select any transfer account in the Enter Transaction screen in the Enter Transactions box as you show in your screen shot. As soon as I select RoC Quicken only allows me to alter the Security Name, the Amount, the Date, and optional Market Value. Perhaps this is another newer change. (I am using version R16.22 2019.)

I am able to use the negative RoC distribution and then include a postive Long-Term Cap Gain Dist for the same amount to balance my records.
Although this may cause problems for some, this isn't a big issue for me as I use Quicken only to do better tracking of gains/losses than my online broker, as well as to include several accounts that aren't held with them.

Thanks again for your input.

All comments

Ps56k2

IDIC said: Several of my Vanguard ETFs have had notional distributions and I need to adjust my book value accordingly in Quicken. How do I do this?

Never heard of this - notional distributions
Is this a Canadian thing -
and where/how are you tracking Book Value ?

IDIC

ps56k said:

IDIC said: Several of my Vanguard ETFs have had notional distributions and I need to adjust my book value accordingly in Quicken. How do I do this?

Never heard of this - notional distributions
Is this a Canadian thing -
and where/how are you tracking Book Value ?

It could be, or it's perhaps known under a different name in the USA and other countries. I include a definition below.

In my investing accounts the term Market Value is used, which I correspond with the book value in my online account statements.

A phantom distribution (or reinvested capital gain distribution or notional distribution) occurs when an exchange-traded fund (ETF) or mutual fund makes a taxable distribution, but it’s reinvested back into the fund as opposed to being paid out in cash.

In the case of ETFs, an investor does not usually receive additional shares as a result of a reinvested distribution (hence the name, “phantom distribution”). This is because ETF providers (a) do not maintain client records, and (b) cannot issue fractional shares. Phantom distributions usually occur when an ETF or fund incurs a capital gain, and the capital gain is reinvested instead of being paid out in cash.

Ps56k2

IDIC said: Phantom distributions usually occur when an ETF or fund incurs a capital gain, and the capital gain is reinvested instead of being paid out in cash.

Thanks for the info -
Can you give some examples of ETF Symbols where this has happened ?
If you don't get cash payout, and you don't get additional shares, then where does this distribution get transcribed in your actual online brokerage account ?

NotACPA

HUH? So, what benefit do you get if:

1) you don't get the cash, and

2) you don't get more shares/units/etc?

Given the above, I think that I'd just delete these "phantoms" ... unless they have some impact upon your tax returns.

Ps56k2

IDIC said: It could be, or it's perhaps known under a different name in the USA and other countries. I include a definition below.
In my investing accounts the term Market Value is used, which I correspond with the book value in my online account statements.

Where are you located ?

Market Value ---> simply the price of the stock x number of shares you own

Book Value ---> more of an internal accounting - orig cost of asset +/- changes,
and NOT the same as Cost Basis, which again is related to your investment purchases

IDIC

NotACPA said:

HUH? So, what benefit do you get if:
1) you don't get the cash, and
2) you don't get more shares/units/etc?

Given the above, I think that I'd just delete these "phantoms" ... unless they have some impact upon your tax returns.

As I understand it, the ETF manager (in this case Vanguard) reinvests the money to, one hopes, create greater wealth over time. The "book cost," as my broker labels it, is adjusted higher to reflect the transaction which reduces the taxes paid when the EFT is sold. So yes, the distribution does impact upon my taxes. That's why I'm hoping, perhaps in vain, for a simple method to record the transaction.

IDIC

Where are you located ?
Market Value ---> simply the price of the stock x number of shares you own
Book Value ---> more of an internal accounting - orig cost of asset +/- changes,
and NOT the same as Cost Basis, which again is related to your investment purchases

I am in Canada, but was told this was a somewhat common distribution in other countries. I could well have been incorrectly informed however.

Perhaps I am mixing the terms, my apologies. I've always been able to have the Cost Basis in Quicken Account Overview equal the amount listed by my broker as Book Cost. I am then able to accurately track my Gain/Loss in Quicken. I input all data manually, which has been easy enough until these notional/phantom distributions were made by Vanguard.

I had hoped one of the options under "Action" in the account screen would allow for the change to Cost Basis, but found nothing during my searches. If you and others don't recognize this procedure, perhaps I will be forced to make some manner of manual change to Cost Basis.

IDIC

ps56k said:

IDIC said: Phantom distributions usually occur when an ETF or fund incurs a capital gain, and the capital gain is reinvested instead of being paid out in cash.

Thanks for the info -
Can you give some examples of ETF Symbols where this has happened ?
If you don't get cash payout, and you don't get additional shares, then where does this distribution get transcribed in your actual online brokerage account ?

VCE and VEF on the TSX. It is transcribed as a transaction in the activity screen, VCE related text below;

ADJ - VANGUARD FTSE CDA INDEX ETF TR UNITS 2018 NOTIONAL DISTRIBUTION ADJUSTMENT TO BOOK VALUE

Tom Young

The accounting here is:

Debit (increase) cost basis of investment

Credit (increase) realized capital gains

J_Mike

@IDIC

If I am following correctly:
You receive a "notational distribution"
Your actual account balance does not increase.

Does the total cost basis increase by the amount of the distribution?
If so, add a negative Return of Capital transaction - negative the amount of the disribution.
The net to cash balance is zero and the cost basis increases.

The remaining issue is what is the correct category and tax line item to use for the distribution? How is it reported on the year end tax forms?

IDIC

J_Mike said:

@IDIC

If I am following correctly:
You receive a "notational distribution"
Your actual account balance does not increase.

Does the total cost basis increase by the amount of the distribution?
If so, add a negative Return of Capital transaction - negative the amount of the disribution.
The net to cash balance is zero and the cost basis increases.

The remaining issue is what is the correct category and tax line item to use for the distribution? How is it reported on the year end tax forms?

Yes, the total cost basis does increase by the amount of the distribution, and your suggestion to add a negative Return Of Capital transaction would seem to be exactly what I'm looking for. Unfortunately, I can't enter a negative amount as every attempt I have made to use a minus sign results in Quicken making it a positive amount.

IDIC

Tom Young said:

The accounting here is:

Debit (increase) cost basis of investment
Credit (increase) realized capital gains

This is tricky to do in Quicken. You can do a return of capital transaction using a NEGATIVE dollar amount. That increases your basis without adjusting your shares and reduces the cash in the Account. Then record a capital gains distribution for the same amount. Result: Capital gain recognized, cash not affected, basis increased.

I'm always leery or using return of capital transactions, especially repeatedly, as my personal experience, (and the experience of other users), is that multiple return of capital transactions can produce some strange results in the Account.

I think this is a Canadian thing, (though I'm not sure), so if there are "rules" as to how the phantom distribution is to be accounted for at the "lot" level, (e.g., FIFO, LIFO, lots bought in the year of the phantom distribution, etc.), then it would be safer to Remove the lot or lots that are affected and then do Adds to put those lots back in the Account with their higher basis.

Deepwater

For both RoC and Reinvested (Phantom) Distributions I use a Return of Capital transaction and set the transfer account to the same as the account the RoC or Phantom Distribution was posted to. This eliminates the need for a Misc transaction to correct the cash balance.

I posted a screen print of a sample transaction on another forum. Note that the screen print is for a RoC transaction (positive $ value). I have not had a problem entering a negative value for the amount for Phantom Distributions.

https://www.financialwisdomforum.org/forum/viewtopic.php?f=32&t=121849&p=635305#p635303

www.AdjustedCostBase.ca is a good free tool for tracking cost basis. Here is their help guide for Phantom Distributions:
https://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/

It is important to adjust your cost base for these transactions since they are taxed in the year received (will be on a T3 slip). If you don't increase your cost base by the amount of the Phantom Distribution you will be double taxed when you sell shares.

Here are 2 more articles in the Globe and Mail
https://www.theglobeandmail.com/globe-investor/investor-education/haunted-by-phantom-etf-distributions/article18225076/

https://www.theglobeandmail.com/investing/education/article-taming-your-etfs-phantom-menace/

J_Mike

@IDIC

Running current QWin Subscription.
Try using the Enter Transactions dialog - top-left of screen.

Just did a test and the negative value was accepted for ROC.

Also tried entering the transaction directly in the register and this failed to accept a negative value - it reverts to a positive value as you reported.

IDIC

Deepwater said:

For both RoC and Reinvested (Phantom) Distributions I use a Return of Capital transaction and set the transfer account to the same as the account the RoC or Phantom Distribution was posted to. This eliminates the need for a Misc transaction to correct the cash balance.

I posted a screen print of a sample transaction on another forum. Note that the screen print is for a RoC transaction (positive $ value). I have not had a problem entering a negative value for the amount for Phantom Distributions.

https://www.financialwisdomforum.org/forum/viewtopic.php?f=32&t=121849&p=635305#p635303

www.AdjustedCostBase.ca is a good free tool for tracking cost basis. Here is their help guide for Phantom Distributions:
https://www.adjustedcostbase.ca/blog/phantom-distributions-and-their-effect-on-adjusted-cost-base/

It is important to adjust your cost base for these transactions since they are taxed in the year received (will be on a T3 slip). If you don't increase your cost base by the amount of the Phantom Distribution you will be double taxed when you sell shares.

Here are 2 more articles in the Globe and Mail
https://www.theglobeandmail.com/globe-investor/investor-education/haunted-by-phantom-etf-distributions/article18225076/

https://www.theglobeandmail.com/investing/education/article-taming-your-etfs-phantom-menace/

IDIC

J_Mike said:

@IDIC

Running current QWin Subscription.
Try using the Enter Transactions dialog - top-left of screen.

Just did a test and the negative value was accepted for ROC.

Also tried entering the transaction directly in the register and this failed to accept a negative value - it reverts to a positive value as you reported.

Thank you very much. You are correct that using the Enter Transaction dialog will allow for a negative value. This has solved the problem sufficiently for my purposes.

IDIC

Tom Young said:

The accounting here is:

Debit (increase) cost basis of investment
Credit (increase) realized capital gains

This is tricky to do in Quicken. You can do a return of capital transaction using a NEGATIVE dollar amount. That increases your basis without adjusting your shares and reduces the cash in the Account. Then record a capital gains distribution for the same amount. Result: Capital gain recognized, cash not affected, basis increased.

I'm always leery or using return of capital transactions, especially repeatedly, as my personal experience, (and the experience of other users), is that multiple return of capital transactions can produce some strange results in the Account.

I think this is a Canadian thing, (though I'm not sure), so if there are "rules" as to how the phantom distribution is to be accounted for at the "lot" level, (e.g., FIFO, LIFO, lots bought in the year of the phantom distribution, etc.), then it would be safer to Remove the lot or lots that are affected and then do Adds to put those lots back in the Account with their higher basis.

Thank you for the response. I followed your method and have had success for the few transactions I've recorded. I've also found, as suggested above, that I can select the Transfer Account be the same as the Account, but only in non-registered accounts.

Thank you to all who assisted me with this issue.