Battered Mutual Funds Saddle Investors With Big Capital Gains
Owning a mutual fund that’s down 20% or 30% is bad enough. Now, holders of many money-losing investments will be asked to pay capital gains taxes too.
The gains come from managers buying and selling securities inside the portfolio over the past year. If they sold a stock they’d owned for a long time, they may have a big gain on it — even if that stock, and the broader fund, are down this year.
Say a fund bought a stake in Meta Platforms Inc. in 2014, back when it was known as Facebook and was trading in the $50s. The stock now trades around $111, so if the fund sold that long-held position it would still have a capital gain, even though Meta has fallen by about two-thirds this year.
As a result, many funds that are down double-digits this year will be distributing capital gains to shareholders, with some as high as 40% or more of the net asset value of the portfolio.
If investors don’t have losses in their own portfolios to offset the fund’s distribution, and hold the fund in a taxable account rather than a 401(k) or IRA, they’ll most likely wind up paying the long-term capital gains tax rate of 15%. (Some gains may be short-term, which means they were held for less than a year, and are taxed at ordinary income tax rates.) Tax is owed on gains even if they are reinvested in the fund.