True, but it isn't a "Capital Gain", it's just an increase in share price.



Yes, unless of course, it is held in a qualified account. Also, the difference between short and long term CG tax rates is significant. Hold it for 366 days and you pay less than if you sell before the 365th day of ownership. (Working on old info here, from memory from back in '06 through '09)


How do you figure? Are you suggesting the Mutual Fund company pays a tax when a stock they hold in a portfolio goes up in value?

Capital Gains are gains that are REALIZED. You haven't realized the gain until you sell the security, just as you haven't realized a loss until you sell.

It is true that if a Mutual Fund sells a position at a price higher than they paid for it, it is a Capital Gain and all the shareholders benefit 'mutually'. This is one of the dangers in buying Mutual Funds late in the year, as many fund managers do a lot of buying and selling in the Fall. You could buy 100 shares of a fund late in the year, see no gain on your position but still be liable for CG taxes by the end of the year.

Edit here; To clarify the above, lets say you buy $1000 worth of a fund that has a "front load" fee - a sales charge and lets say that is 5%. You buy a grand worth, the fund company takes the 5% off the top and your account is credited with $950 worth of fund shares. If the fund realizes a capital gain on a particular stock or stocks but that gain does not total more than $50.00, you are still liable for the capital gains tax even though you haven't realized a gain on your initial investment of one thousand dollars. When you sell the fund shares then yes, you are liable for CG tax on the money above $1000 realized by the sale. BUT....if memory serves, the 1099 you get from the MF company will reflect only taxable gains on increase in share price, not gains on individual shares the manager sold along the way.

I own shares in a mutual fund that has been increasing in value at a modest rate. Come tax time, I've been shocked the last two years at the huge "capital gains distributions" (CGD) from the fund that I must pay tax on. How can the "capital gains distribution" be higher that the increased value of the fund?

If a fund holds a stock and the stock price rises the fund should rise the same amount, of course everything else being equal. Let's see if I can give an example. Let's say the fund owns a stock that goes up $10 in value. The fund would also go up the same $10. If I sold my fund I would pay tax on that increase. If I didn't sell and the fund sold, their value wouldn't change (still showing a $10 increase in value) and I would be taxed on the $10 profit via CGD. Then if I sold the fund I would again pay for the $10 increase in the funds worth.

I know I must be doing something wrong but getting stuck with large CGD while my fund value is going up modestly is crap.

Last edited Wed Apr 13, 2016, 03:22 PM - Edit history (2)

I have admitted in the past and will say again, I am by no means an accountant or a tax expert, so I want to be careful that I don't misinform.

So....

Because they held on to other shares that decreased in value.
Let's say you have bought shares of the "DU Income and Value Fund". There are plenty of real funds that have similar names, so whenever you see "Income" in the name of a fund, it means they either have a lot of dividend paying stocks or interest paying bonds or both, in other words, they hold positions that generate income.

So the DU I & VF has a share price at the beginning of the year of ten bucks. They hold 100 positions each trading at $10 a share and there are currently 100 shares out there, so the "Net Asset Value" of each share is $10. OK?

During the course of the year, the share price of ABC company spikes to $15 and the manager decides to sell and buy positions in 2 new firms, each priced at $5. He distributes the extra $5 to the shareholders as a capital gain, BUT the NAV of the fund has not changed. Now we have a portfolio of 11 positions, STILL valued at $1000. See?

Of course, most mutual funds have often dozens, if not a few hundred positions, so not only are there gains there can be and are losses as well. Just like you (if you have a taxable trading account), the Mutual Fund can offset gains with losses so that if they equal each other, there is no gains tax.


Not necessarily. Keep in mind my VERY simplistic example above. A real MF is of course much more complex and the way they determine NAV is by adding up the value of each and every position they have and dividing that by the number of shares held by the fund participants. A large gain in one single position will not necessarily reflect a large gain in the Mutual Fund share price.

BTW, this 'adding up' process is done at the end of the day after each and every trading session for every single Mutual Fund out there. After the closing bell rings, the computers start humming at Vanguard, Fidelity, Dodge & Cox, American Funds, Franklin Templeton and all the rest!



Here's the screw up of mine....Original text;


Attempt to correct the screw up!;
You said: "Let's say the fund owns a stock that goes up $10 in value. The fund would also go up the same $10."
Not necessarily as explained elsewhere.
" If I sold my fund I would pay tax on that increase.
If the share price has risen above your purchase price, then correct.
"If I didn't sell and the fund sold, their value wouldn't change (still showing a $10 increase in value) and I would be taxed on the $10 profit via CGD"
You are most definitely taxed on any capital gains distribution made by the fund, Yes. But as far as the price of an individual share going up in this scenario, not necessarily, as explained elsewhere.
"Then if I sold the fund I would again pay for the $10 increase in the funds worth."
If you sell the shares of this Mutual Fund for more than you paid for them, then yes, you will owe Capital Gains tax, just like when you sell a house, or any other asset for more than you paid for it.





This part; "If I didn't sell and the fund sold, their value wouldn't change (still showing a $10 increase in value) and I would be taxed on the $10 profit via CGD" is not completely accurate. Again, back to the DU I &VF; If the manager held on to that stock that went up to $15 then yes, the share price would increase. But that's not what your scenario is indicating. We are talking about MUTUAL Funds, held mutually by the shareholders. The manager does not hold cash beyond what the prospectus calls for so if he sells a position and distributes the gain to shareholders, it does not become an increase in share price or NAV.

I know it looks like you are being taxed twice on the same gain, or at least that's what I am getting from you, but again, it is my understanding that the 1099 you get from the MF company takes all of this into account.

If I'm wrong and a tax specialist can correct me, please do so!

it doesn't seem right doesn't mean it isn't right. The bottom line is my mutual funds modest increases are misleading because I do have dividend reinvestment. When I subtract the tax I pay from the modest gain, I am losing money.

One clarification. If a fund sells a stock for a profit and sells another for a similar loss, don't those balance out?

Absolutely. And as a result the NAV won't change. Even if they didn't sell either position, the NAV would not change.

And not to get too nosy, but I am curious as to what fund it is you are talking about.

If you haven't already, may I suggest you look up the fund on www.morningstar.com ?

Enter the 5 letter ticker and you will get all sorts of info on it, including the top ten holdings. If you go to the Fund family's website, you can find the entire portfolio. Looking through the positions they hold may give you some indication as to why it has been flat or nearly flat for a while.

Keep in mind that the S & P 500 has been up and down dramatically over the last 12 months, but is currently fairly close to where it started a year ago;

https://www.google.com/search?q=s%26p+500&ie=utf-8&oe=utf-8