02 May Watch out for mutual fund capital gains distributions
Case Study II
Hector purchases 200 shares of an equity mutual fund on Dec. 1, 2015, at $100 per share, for a total investment of $20,000. The next week, the fund makes a capital gains distribution of $15 per share. Hector ends up with capital gains of $3,000, reportable on his 2015 return. It doesn’t matter whether the actual value of the shares has increased or even decreased since Hector purchased them, or whether he reinvests the proceeds back into the same fund.
Why? The distribution itself is a taxable event. If capital gains distributions from the mutual fund are reinvested in the fund, the distribution itself doesn’t change Hector’s value in the fund. It simply increases the number of shares he owns. Yet now at a lower per-share value.