Yes the share price has been falling but are you hurt? No, not at all provided your investment resides in a taxable account. This is the beauty of tax-free ROC distributions. For this illustration, let's ignore the 1-cent portion split between income and capital gain and focus on the six cent ROC portion of the monthly distribution. The IRS views ROC as non-taxable distributions and your broker automatically deducts them from your cost basis. When you sell shares, your capital gain or loss is based on the proceeds of the sale minus your cost basis. Since you're selling at a loss and also subtracting your ROC adjusted cost basis, your capital gain may actually turn into a capital loss. So essentially, you are banking carry forward capital loss that can be used in the future to offset capital gain. You end up with the ROC distributions in your pocket and your capital loss banked. Not a bad deal.
But what about the Fiscal Cliff? Currently, long term capital gains are taxed at the zero percent rate if your total income (including capital gain income) places you in the ten or fifteen percent tax brackets. Or the 15% rate if your total income (including capital gain income) places you in the twenty-five percent tax bracket or higher.
Starting 2013 (unless congress acts), the special tax rates on long-term gains and qualified dividends will expire on December 31, 2012. Starting 2013, the tax rate on long-term gains will be 20% (or 10% if a taxpayer is in the fifteen percent tax bracket). Also starting in 2013, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates. Also beginning in 2013, capital gain income will be subject to an additional 3.8% Medicare tax.
So, it would be advantageous to keep your income range in the 15% bracket. We may see a lot of year end selling to take advantage of the current rates and to duck the new 3.8% Medicare tax.
So how will you beat the new 3.8% Medicare tax? With respect to taxable accounts, you can't. Even if you don't sell, eventually ROC will eat up all your cost basis and you can't have a zero cost basis. Any ROC distributions after you hit zero cost basis are taxed in the year they are received as capital gains. So this nice little nugget, part of the so called Affordable Healthcare Act, punishes those who take risk. More affordable for those who didn't plan for retirement and have no investments and less affordable for those who scrimped, saved, and planned.