Mutual Fund Capital Gains Distributions
If you own mutual funds in a taxable account, you may find yourself with a tax bill for mutual fund capital gains and income distributions. You may have to pay taxes on these gains even if you didn’t sell a share of the mutual fund, and even if you reinvested the income or capital gain right back into the fund. You may even face a tax bill on a fund that had a negative return for the year if the fund realized accumulated gains.
What Are Capital Gains?
You “realize” a gain when you sell a security for a higher price than you bought it for. You may owe taxes on your profit (the amount in excess of your original purchase price). If you sell a security that you’ve owned for less than one year, it is considered a short-term gain and is taxed at your ordinary income rate. If you sell a security you’ve owned for more than one year, it is generally considered a long-term gain and is taxed at the capital gains rate.
Capital Gains Tax Rates for 2023
| Tax-Filing Status | 0% Tax Rate | 15% Tax Rate | 20% Tax Rate |
|---|---|---|---|
| Single | $0 to $44,625 | $44,626 to $492,300 | Over $492,300 |
| Married (filing jointly) | $0 to $89,250 | $89,251 to $553,850 | Over $553,850 |
| Married (filing separately) | $0 to $44,625 | $44,626 to $276,900 | Over $276,900 |
| Head of Household | $0 to $59,750 | $59,751 to $523,050 | Over $523,050 |
If you sell a security for less than you paid for it, that is called a capital loss, which can be used to offset capital gains.
How Mutual Fund Capital Gains Distributions Are Taxed
When a mutual fund sells securities that have appreciated in value and the fund doesn’t have any offsetting capital losses, it must distribute those gains, as well as any dividends or income payouts, to shareholders. Shareholders, in turn, are required to pay taxes on the gains (assuming they don’t have any offsetting capital losses in their own portfolios). Capital gains distributions are usually paid out once per year, typically in December.
A Fund’s NAV May Be Reduced by Capital Gains Distributions
A fund’s NAV, or net asset value, is calculated by taking the values of its assets (such as stocks, bonds and cash), subtracting its liabilities, and dividing by the total number of shares outstanding. Capital gains and income distributions reduce a fund’s NAV by the amount of the distribution per share. However, this doesn’t have a direct impact on the fund’s total return, as your total investment value does not change.
You can find more information on Kirr, Marbach Partners Value Fund’s 2023 Capital Gain and Income Distribution here.
Check with your financial professional for updates. Information contained herein is current as of 2/28/2024. It is subject to legislative changes and is not intended to be legal or tax advice. Consult a qualified tax advisor regarding specific circumstances. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties expressed or implied are hereby excluded.
