SPYI’s 12% Payout Creates a Tax Bill That Could Die With You

NEOS S&P 500 High Income ETF (SPYI) delivers a 12% distribution rate, but the tax implications are more complex than it appears. Roughly 96% of those payouts are classified as return of capital, which reduces the investor's cost basis rather than generating taxable income. This tax trick extends until the basis is depleted, at which point distributions become taxable capital gains.

Younger investors holding SPYI in taxable accounts may face large deferred tax bills as their basis is gradually eroded over decades. Fortunately, heirs inheriting shares receive a stepped-up basis at death, eliminating the deferred tax liability. This makes SPYI an attractive option for older investors planning to pass on their holdings to heirs.

However, younger investors may want to consider alternative investments to avoid the tax pitfalls associated with SPYI's return of capital distribution structure.