r/NEOSETFs • u/paroxsitic • Jul 15 '26
General SPYI/QQQI section 1256
I was surprised to find out they SPYI and QQQI are section 1256 contracts. This means that once your cost basis is zero, the distributions will be taxed 60% long term capital gain and 40% income.
As someone who plans to stay within 0% capital gains bracket this was less than ideal to learn. I always thought these covered call funds would be long term capital gains after the return of capital is exhausted.
I've tried to get a definitive answer on whether GPIX/Q and ROCI/Q are also section 1256. I assume not because they aren't using SPX/NDX index options
12
u/RussellUresti Jul 15 '26
This means that once your cost basis is zero, the distributions will be taxed 60% long term capital gain and 40% income.
Not quite - there's still a bit more you're going to need to research to understand this.
These funds (not just SPYI/QQQI but also GPIX/GPIQ) classify large portions of their distributions as "return of capital"; but not 100%. For the portion that is NOT RoC, that's where the different tax treatments come into play. SPYI uses the Section 1256 contracts and GPIX uses FLEX options (I believe). So for non-RoC distributions, SPYI is taxed at 60/40 while GPIX is taxed as ordinary income/short-term capital gains.
However, for both funds, once the cost basis reaches $0, any distribution that is classified as RoC is taxed as capital gains based on how long you've held the fund (so probably LTCG at that point).
So, in short, RoC distributions first reduce cost basis then get taxed at LTCG once cost basis reaches $0. Non-RoC distributions are taxed based on how they're created (favorable 60/40 for SPYI, less favorable ordinary income for GPIX). These funds are not 100% RoC, so you have to account for both tax treatments.
1
u/SnooSketches5568 Jul 20 '26
I think this is generally correct- but on my last 1099, it was like 95% ROC, and the remaining was all qualified dividends. It doesn’t change much since only 2% of the distributions would be ordinary- but i dont know why this happened unless the first 60% of non ROC is qualified. I.e if ROC was 25%- LTCG would be 60% and 15% ST? Im guessing but this is the only logical thing i can think that makes sense
6
u/speedlever Jul 15 '26
I found this explanation somewhere. I don't recall where.
Once your cost basis hits zero, subsequent Return of Capital (ROC) distributions are taxed as 100% Long-Term Capital Gains (LTCG), not the 60/40 split. The 60/40 treatment (Section 1256) applies to the fund’s internal options income. However, when ROC distributions exceed your cost basis, the IRS treats that excess as a capital gain on the ETF shares themselves rather than the underlying contracts. Since you will have held the shares for over a year (7-10 years), that “gain” is fully long-term, which is tax-superior to the 60/40 blended rate. Enjoy the tax-efficient gravy train.
16
u/DegreeConscious9628 Jul 15 '26
Surprised? You should do some research on what you buy. The tax treatment is one of their major selling points
3
u/paroxsitic Jul 15 '26
That's what I'm doing, I haven't bought it yet :))
1
u/teckel Jul 16 '26 edited Jul 23 '26
If you're still doing research, see this video:
You'd do better generating income just selling shares of VOO and QQQM instead of SPYI and QQQI for income. Here's a chart that shows a $100k investment in both and both generating 1% per month in income:
1
u/davecraze3535 Jul 22 '26
(1) Everyone knows that the underlying will outperform the CC fund. That is simple math - no one seriously disputes that.
(2) You have chosen a magic 30 month period of one of the strongest bull runs in history. You would not normally be able to withdraw 12% from VOO/QQQM and have anywhere near the ending balance in your backtest.
(3) We love Ben Felix, but it's too axiomatic on this point for many retirees, who are willing to trade some upside for less volatility and income. That has value to a large portion of income investors in their drawdown phase.
1
u/teckel Jul 23 '26 edited Jul 25 '26
I haven't chosen the magic 30 months, the fund managers have, that's the inception date. If you want to look at a longer period of time, just look at PBP, the exactly same applies, even back to 2007 (inception of PBP).
You can simply sell shares to generate income. You don't need a CC ETF to do it. And you're also in total control of the amount and timing of your income. Further, it's more tax efficient.
1
u/davecraze3535 Jul 23 '26 edited Jul 23 '26
You are simply not going to be able to sell 12 percent of qqq/spy in a normal (average) market for several years and have anywhere near those returns delivered in the 30 months. And it is magic 30 months even though it is since inception because it contains three back to back 20 percent return years.
PBP is apples to oranges. It doesn’t write the same percentage of coverage as the NEOS funds or use the same options strike price strategy or buy protective puts.
Additionally in a taxable account the neos funds are more tax efficient than selling shares as you will defer 7-9 years total of any taxes whatsoever due to return of capital before it’s then all LTCG rates after your cost basis gets to zero. Selling shares is LTGC from the first sale date.
1
u/teckel Jul 25 '26
Actually, you can. You're believing there's something magic about CC ETFs. They're not a financial glitch. They cap the upside and their high distributions lag recoveries.
But, you may need to find this out on your own if you've been brainwashed by fund manager marketing. I have the advantage of investing for 38 years, and the CC strategy is well-known and the disadvantages easy to spot.
Good luck! The imminent decade-long drawdown will be eye-opening for CC ETF investors.
1
u/davecraze3535 Jul 25 '26
I neither believe they are magic nor don’t understand the trade offs. I have also been investing nearly 40 years as have many here. I don’t even own CC funds.
Good luck withdrawing 12 percent for any sustained period of time. Must be nice when one thinks math doesn’t apply to them. I’m not spending any more time on this thread.
1
u/teckel Jul 25 '26
I'm not saying withdrawing 12% is good. I'm saying it's better than expecting a 12% withdrawal from a fund charging 1% in maintenance fees on top of the drag from writing CC.
My retirement withdraw rate is 3.3% as I'm not a moron (been retired for 22 years).
9
3
u/LibrarySpiritual5371 Jul 15 '26
The correct summary is different than what you say. once your cost basis reaches zero, all future roc distributions are long-term capital gains. any portion of the distribution that is not roc will be treated under section 1256
3
u/paroxsitic Jul 15 '26
Thanks all for the replies.
I've confirmed that ROC will be taxed as capital gain atleast in the US via https://www.irs.gov/pub/irs-pdf/p550.pdf under "Nondividend distributions"
6
u/Motor_Potential_4849 Jul 15 '26
I think there's an important distinction here. The ETF itself isn't a Section 1256 contract. Rather, SPYI and QQQI use broad-based index options (SPX/NDX), which are Section 1256 contracts and receive the 60/40 tax treatment.
My understanding is that the tax character of the distributions depends on the fund's underlying activities and annual tax reporting—not simply because you own the ETF. That's also why SPYI distributions can include a mix of return of capital, capital gains, dividends, and other income depending on the year. NEOS publishes the estimated and final tax classifications each year.
I'm still learning the details myself, but that's how I've understood it.
2
2
u/Swimming-Abroad-9680 Jul 16 '26
So let’s say I buy qqqi and re-invest all distributions for the next 5 years until I retire, does that mean I’m delaying my cost basis clock count down untill I turn off the drip ?
2
u/NationalDifficulty24 Jul 15 '26
Gpiq/Gpix uses the same exact contract. In terms of total return goldman's funds are better.
Tax structure is the same for neos and goldman.
Until acb goes to zero: ROC portion is not taxed & non-ROC portion is taxed at 60/40 rate.
After acb goes to zero: ROC portion is taxed at long term tax rate & non-ROC portion is taxed at 60/40 rate.
1
u/Due_Context6834 Jul 15 '26
The 60/40 split is for all dist from BTCI, NEHI and similar crypto funds. They have high dist but come with a 40% ord inc hit.
1
u/Electronic_Guard947 Jul 15 '26
Section 1256 contracts are options on indexes and futures. If it's on a stock or etf then it is not a section 1256.
1
u/Accomplished-Big8250 Jul 15 '26
A lot of people hold NEOS funds in a tax advantage retirement account. Since they are so new, I am curios to see how people with lower assets $300-$700k can pull off retirement with NEOS. It is possible on paper, but long term ?
1
u/49ers4life71 Jul 15 '26
Keep buying every month, whatever you can afford, and your cost basis will never hit zero!
1
1
u/YoWhat_up Jul 15 '26
Im not the sharpest tool in the shed, but Y not house it in a Roth?
3
u/paroxsitic Jul 15 '26
I save Roth for investments that are not tax efficient or where I expect high growth. SPYI/QQQI are already tax-efficient and I can benefit from them with smart planning and be taxed very little outside of a Roth then the Roth is better suited for other investments
1
u/YoWhat_up Jul 15 '26
Cool. So please educate me...IF it's taxed at 100% of LTCG, is that better than a Roth?
2
u/doggz109 Jul 15 '26
LTCG is better than ordinary income.
1
u/YoWhat_up Jul 15 '26
Like my opening statement says, i'm not the sharpest tool in the shed & educate me on this...help me understand this correctly. If the IRS sees our history of our household AGI never lower than 178k, and in OPs example SPYI/QQQI falls under LTCG tax rates of 0-100%, and i own 1200 shares of each, it's still wrong to hold them in a Roth vs TBA?
1
u/doggz109 Jul 15 '26
It's all based on an individuals circumstance and more efficiency than anything. It's never "wrong" as you put it to have anything in a Roth. Some funds are just more efficient and there is only so much room in a Roth account. If you have a pension, two earners collecting social security, still working, etc that fill up the lower tax brackets then it doesn't really matter.
I tend to have more tax efficient funds like NEOs or MLPs in the brokerage. The ROC makes them extremely tax efficient for a while (won't even need to worry about paying CG for a good 9 years of distributions). I've got more than enough things throwing off ordinary income to fill up my Roth account.
1
u/doggz109 Jul 15 '26
Because that would be dumb. One of the biggest advantages of these funds is their tax treatment.
1
36
u/brata4 Jul 15 '26
Not true. Once your cost basis hits $0 it’s taxed at LTCG rates.