The original blog … Mutual Funds and Capital Gains = tax confusion! … that inspired my syndicated article below …. explains BOTH sources of mutual funds capital gains taxes in more detail.
One source of capital gains is from what the fund manager does – and is the source of this type of tax confusion. The second source of capital gains results from your actions. Both result in money you received, why it is called a gain.
The first source is confusing because the fund used your proportional share of those gains to buy you more shares in the fund (unless you had them send the cash to you instead). You received an “economic benefit” from your share of those gains (gains net of losses) … and that is why you owe the capital gains tax.
The second source is easier to see because the gain is the difference between the amount you received when you sold some shares in the fund and your “cost basis.”
The below article discusses how this may happen when a fund value goes down and there are still capital gains you’re taxed on.
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