What are the tax implications for shareholders receiving liquidation distributions, and how does this compare to similar fund closures in the credit space?

Tax treatment of the liquidation payout

When a credit‑focused closed‑end fund like BNY Mellon Alcentra Global Multi‑Strategy Credit (XALCX) winds down, the final “liquidation distribution” is not a return of the original capital in the same way a regular dividend is. The IRS treats the payout as a sale of the shareholder’s interest in the fund. Any portion that exceeds the shareholder’s adjusted cost basis is taxed as a capital‑gain (short‑ or long‑term depending on how long the shares were held). If the distribution includes a return‑of‑capital component—i.e., the fund’s net asset value falls below the share price—that portion is generally non‑taxable until the basis is fully recovered, after which any remaining amount is again capital‑gain. In practice, most of the liquidation will be reported on the 2025 tax return as a capital‑gain, and the character (ordinary vs. capital) can shift if the fund held “qualified” dividend‑type income that is taxed as ordinary before the liquidation.

Comparison with recent credit‑space fund closures

The tax profile mirrors what we have seen in other credit‑sector closures (e.g., the 2023 wind‑down of the PIMCO Income Fund and the 2024 termination of BlackRock Credit Advantage). Those funds also generated a final distribution that was taxed as a capital‑gain rather than ordinary income, because the liquidation effectively “sold” the remaining portfolio assets to shareholders. The key difference is the size and composition of the portfolio: Alcentra’s multi‑strategy credit mix includes a higher proportion of high‑yield and structured‑credit assets, which can generate a larger capital‑gain component than a more “income‑focused” credit fund that may have a higher ordinary‑income share. Consequently, shareholders of XALCX should anticipate a potentially higher tax bill than those who held the more traditional credit‑income funds.

Actionable trading implications

1. Pre‑liquidation price pressure: Expect a modest sell‑off in XALCX as investors position for the known distribution date (≈ 29 Aug 2025). The market will likely price‑in the net asset value (NAV) and the expected tax drag, so a short‑term down‑trend is probable.

2. Tax‑efficiency planning: Holders in taxable accounts may want to offset the capital‑gain with losses elsewhere in the portfolio or consider moving the position into a tax‑advantaged vehicle before the distribution.

3. Liquidity opportunity: As the fund approaches termination, the spread between the market price and the NAV often narrows, creating a temporary arbitrage window for investors who can capture the residual premium before the final payout.

In short, the liquidation distribution will be taxed primarily as a capital gain, similar to other credit‑space fund closures, but the multi‑strategy nature of Alcentra may push the tax liability higher. Positioning for the expected price compression and managing the tax impact are the two primary levers for maximizing post‑liquidation returns.