Investments Pay and So Might YouSubmitted by Prosperity Advisory Group on September 28th, 2018
by Sara Stebbins
It’s about that time of year again!
Throughout the year, mutual fund managers buy and sell underlying holdings within the mutual fund. Similar to the individual investor, mutual funds realize capital gains when they sell a security for more than they bought it for (the cost basis). Also like individual investors, these capital gains can be long-term or short-term (or a combination of both). Mutual funds will pay these capital gains to shareholders as capital gain distributions.
How Do Capital Gains Distributions Affect You?
The answer is simple – the same as any other capital gain. These gains are included on Schedule D of Form 1040 which is then included as income on your tax return. While short-term capital gains are taxed as ordinary income, long-term capital gains are taxed at more favorable rates.
Can Capital Gain Distributions be Avoided?
Because tax law requires mutual funds to distribute a substantial portion of capital gains to investors, you cannot avoid the distribution if you are a shareholder on the record date for the distribution. However, mutual fund companies will publish estimates for capital gain distributions ahead of time along with the record date. Mutual fund companies typically start announcing their year-end capital gain distribution estimates at the beginning of the 4th quarter. As long as you do not own the mutual fund on the record date, you will not receive the capital gain distribution.
Keep in mind that you may incur a capital gain by selling the mutual fund!
To learn more about capital gain distributions and how they might impact you, contact Prosperity Advisory Group.