|
Posted by Barry Margolin on March 18, 2007, 2:18 am
Please log in for more thread options
> Barry Margolin wrote:
>> The fund reduced the NAV at the time they made the
>> distributions, so the capital gain at sale time has
>> already been reduced, and that avoids the double
>> taxation.
> Barry - dumb question I've wondered about for a while. If
> the NAV is reduced by the amount of the capital gain (which
> is true), so what's the big deal about receiving them if the
> value of what you own after the distribution is the same?
> Or is that true?
Suppose you buy the mutual fund the day before it declares
the gain. The next day it declares the gain. The value of
what you own is the same, but suddenly you owe taxes on it.
You're paying income or capital gains taxes even though you
did not receive any income or increase in value. The term
for buying a fund right before it makes a distribution is
"buying a dividend".
Compare that with owning a fund for the whole year before it
makes the distribution. In this case, if its holdings
increased in value during the year, so did the NAV. When it
distributes the gain, much of this is gain that you actually
saw in your holding. So you end up paying taxes on
something you actually received.
It's still somewhat of a big deal, but not as bad as buying
a distribution. Your paper gains are turned into income or
realized gains when the fund distributes them, so you can't
put off paying taxes. And in the case of capital gain
distributions, they may include gains that had been
accumulating in the fund for years before you purchased the
shares.
--
Barry Margolin, barmar@alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
| 
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap