Actively-managed mutual funds typically distribute their accumulated capital gains in November of each year, and investors who hold their funds in taxable retail accounts are required to pay tax on their proportionate share of the fund’s realized gains for the year. Investors who wish to purchase shares of these funds at this time of year therefore need to wait until after the gains have been distributed, because all shareholders of record on the date that the gains are distributed will owe tax on the gain. This means that investors who purchase shares of a fund right before it distributes it capital gains will owe tax on the previous year’s gains, even though they did not receive them.
Capital gains distributions are not expected to be high for most mutual funds this year, despite the gains that have been posted in the markets. However, there are a few funds that will be distributing substantial gains this year, and investors who own shares in these funds outside of an IRA or tax-deferred retirement plan need to be prepared to see some big numbers on their form 1099-Bs.
The steady rise in the markets since 2009 has led to some outsized gains in a few funds that are finally being realized as long-term winning holdings have been sold off. The following fund companies have released their estimated gains that they will be distributing to shareholders for 2016. (For related reading, see: Trump Advisor Promises Repeal of Fiduciary Rule.)
Mutual fund shareholders who own these funds in a taxable retail account may want to pursue a tax-loss harvesting strategy in order to offset some of their taxable gains. They can sell shares of losing holdings and then buy them back after 31 days in accordance with the IRS wash sale rules. They can then net their realized losses against their gains in order to minimize their tax bill. (For related reading, see: 4 Mistakes Clients Make With Roth IRAs and Their Estate.)