U.S. Capital Gains Tax Considerations
U.S. mutual funds are required by law to distribute realized capital gains to their shareholders. If a mutual fund sells a security for a gain, the capital gain is taxable for that year; similarly a realized capital loss can offset any other realized capital gains.
Scenario: An investor entered a mutual fund during the middle of the year and experienced an overall loss for the next 6 months. The mutual fund itself sold securities for a gain for the year, therefore must declare a capital gains distribution. The IRS would require the investor to pay tax on the capital gains distribution, regardless of the overall loss.
A small investor selling an ETF to another investor does not cause a redemption on ETF itself; therefore, ETFs are more immune to the effect of forced redemptions causing realized capital gains.
Read more about this topic: Index Fund
Famous quotes containing the words capital, gains and/or tax:
“Like cellulite creams or hair-loss tonics, capital punishment is one of those panaceas that isnt. Only it costs a whole lot more.”
—Anna Quindlen (b. 1952)
“Theodotus: Caesar: once in ten generations of men, the world gains an immortal book. Caesar: If it did not flatter mankind, the common executioner would burn it.”
—George Bernard Shaw (18561950)
“I find nothing healthful or exalting in the smooth conventions of society. I do not like the close air of saloons. I begin to suspect myself to be a prisoner, though treated with all this courtesy and luxury. I pay a destructive tax in my conformity.”
—Ralph Waldo Emerson (18031882)