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:
“Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will always be needed.”
—Mohandas K. Gandhi (1869–1948)
“Yet whatever gains I had, these I have come to regard as loss because of Christ. More than that, I regard everything as loss because of the surpassing value of knowing Christ Jesus my Lord. For his sake I have suffered the loss of all things, and I regard them as rubbish, in order that I may gain Christ and be found in him, not having a righteousness of my own that comes from the law, but one that comes through faith in Christ, the righteousness from God based on faith.”
—Bible: New Testament, Philippians 3:7-9.
“People buy their necessities in shops and have to pay dearly for them because they have to assist in paying for what is also on sale there but only rarely finds purchasers: the luxury and amusement goods. So it is that luxury continually imposes a tax on the simple people who have to do without it.”
—Friedrich Nietzsche (1844–1900)