The Tax and Portfolio Implications of the China Fund, Inc. (CHN) Liquidation

The China Fund, Inc. (CHN) has announced its plan for liquidation and dissolution, a decision approved by its Board of Directors on June 20, 2025, and set for shareholder approval at a Special Meeting, according to the company's press release (company's press release). With total net assets of $156.43 million and a net asset value (NAV) of $16.27 per share as of July 31, 2025, the liquidation presents both challenges and opportunities for investors. This analysis explores the tax implications of the liquidation and outlines strategic reallocation strategies to optimize portfolio efficiency and tax outcomes.

Tax Implications of CHN Liquidation

The liquidation of CHN will trigger distributions of its net assets, which will be taxed based on the nature of the gains. For 2025, long-term capital gains (on assets held over a year) are taxed at 0%, 15%, or 20%, depending on income levels, according to the 2025 capital gains rates (2025 capital gains rates). Short-term gains, taxed at ordinary income rates (up to 37%), and the 3.8% Net Investment Income Tax (NIIT) for high-income taxpayers, could significantly impact after-tax returns. For example, a single filer with taxable income exceeding $533,400 would face a 20% long-term capital gains rate plus the 3.8% NIIT, totaling 23.8%.

Special considerations apply to specific assets, such as collectibles (28% tax rate) and qualified small business stock (28%), though these are less relevant to CHN's portfolio. Investors must also account for the fund's recent $0.1497 per share ordinary income distribution in January 2025, which will be taxed at ordinary income rates.

Strategic Reallocation for Tax Efficiency

To mitigate the tax burden, investors should consider the following strategies:

1. Tax-Loss Harvesting: Selling underperforming assets in taxable accounts to offset CHN gains can reduce net tax liability, as outlined in tax-efficient investment strategies (tax-efficient investment strategies). This is particularly effective in volatile markets, where losses can be leveraged to balance gains.
2. Long-Term Holding Periods: Reinvesting liquidation proceeds into assets held for over a year qualifies for lower long-term capital gains rates.
3. Tax-Advantaged Accounts: Roth IRAs and 401(k)s offer tax-free growth, shielding gains from capital gains tax. For instance, reinvesting CHN proceeds into a Roth IRA could eliminate future tax liabilities on withdrawals.
4. Opportunity Zones and 1031 Exchanges: Deferring gains via opportunity zone investments or 1031 exchanges (for real estate investors) allows tax deferral or elimination.

Alternative Investments for Post-Liquidation Reallocation

The liquidation of CHN opens a window to reallocate capital into alternative investments, which offer diversification and tax advantages:

• Real Estate: U.S. value-added real estate projects are projected to deliver 10.1% annualized returns over 10–15 years, according to Morguard results (Morguard results). Depreciation and capital gains deferral further enhance tax efficiency.
• Private Equity: With expected returns of 9.9% over a similar timeframe, private equity allows direct investment in private companies, offering growth through exits or IPOs.
• Infrastructure: Global infrastructure spending is projected to exceed $9 trillion in 2025, with renewable energy and transportation projects providing steady cash flows and inflation protection.
• ESG-Aligned Investments: Impact investments in sustainable agriculture or renewable energy align with personal values and offer tax incentives.

Conclusion

The liquidation of CHN necessitates a proactive approach to tax planning and portfolio reallocation. By leveraging tax-loss harvesting, long-term investments, and alternative assets like real estate or private equity, investors can minimize tax liabilities while capitalizing on growth opportunities. As the Special Meeting for CHN's liquidation approaches, personalized strategies-guided by tax professionals-will be critical to navigating this transition effectively.