Skip to Content
Fund Spy

A Fresh Call to Right a Tax Wrong

Will the mutual fund tax code be brought into the modern era?

Politicians fight like heck to be seen as champions of the middle class but somehow never show much interest in the mutual fund tax penalty. My guess is they want to sound like champions, but many are such products of old money that they don't know much at all about mutual funds--let alone the tax penalty.

The current rule requires that fundholders pay taxes whenever their funds realize gains and distribute to them. And funds are required to distribute nearly all the gains they realize in a given year. This means fundholders receive a pile of distribution forms in an up year for the market and have to pay a tax bill even if they've lost money on their investments. See what taxpayers had to do in April 2008 for an example.

So, it was refreshing to hear suggestions made to Congress that they remove the penalty. The Committee on Capital Markets Regulation, a non-partisan think tank, released a report by Harvard Law Professor John C. Coates that suggests that investors shouldn't have to pay taxes on funds until they sell them. Specifically, he says this should apply to all who own less than 2% of a fund's total shares.

To view this article, become a Morningstar Basic member.

Register for Free