We all know it, but it's easy to forget: Money earned from mutual funds isn't free. As is true for any other source of income, Uncle Sam gets his cut. Mutual fund investors should be particularly attuned to taxes as the year winds down because that's when funds typically pay out capital gains to shareholders. In this article, we'll tell you what you need to know about mutual funds and capital gains, as well as steps you might consider taking to minimize them.
Defining Capital Gains
Fund investors have to pay taxes on their mutual funds in a variety of different scenarios. (Note: The following applies only to investors in taxable accounts. Investors in tax-sheltered accounts, such as IRAs and 401(k)s, generally receive much more favorable tax treatment.) If a bond fund makes regular income payments or a stock fund pays dividends, you have to pay taxes on those payouts. You also have to pay taxes if you sell a fund and the fund has appreciated in value over the time you owned it; that's called a capital gain.
Marta Norton does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.