A Year-End Surprise: A Tax Bill on Top of Your Mutual-Fund Losses
Investors need to decide soon how to handle capital-gains distributions from their mutual funds. ‘It’s like getting hit when you’re down,’ says one retiree.
By Laura Saunders, The Wall Street Journal, Dec. 9, 2022
This is happening because fund managers have had to sell holdings to raise cash to pay investors leaving their funds. That often triggers payouts of taxable capital gains for investors who remain…
Here’s what’s behind the large payouts: By law, mutual-fund managers can sell holdings that have declined in value and save up capital losses to offset future capital gains on holdings that have risen in value. However, each year they must send current investors almost all net capital gains that aren’t offset by losses.
After years of strong markets, many managers had few losses this year to offset gains on sales of winners. So when fundholders sold as markets tumbled, the managers often had to sell winners to meet redemptions—and the capital gains on the sales were then spread among remaining fundholders. … [end quote]
This only affects taxable accounts, not IRAs. Better candidates for taxable accounts are passive investments in equities such as exchange-traded funds and index funds that seldom have large payouts.
I once made the mistake of buying into a mutual fund in November, only to be surprised by a taxable capital gain on a distribution in December. That’s how I learned the hard way to check the distribution date before buying a fund. That was before ETFs were offered.
Wendy