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Time for Tax Fairness for Fund Investors

The carried interest loophole for hedge funds should be closed, with the proceeds helping to pay for removal of the punitive taxes borne by fund investors.

With Democrats controlling the presidency and Republicans the legislative branch, political analysts are trying to identify policy areas where the two parties might reach agreement. Here is a suggestion for our political leaders: Work together to provide tax fairness to mutual fund investors.

Mutual funds have many terrific qualities, including (at times) low costs and broad diversification, but tax inefficiency can offset some of those benefits. By law, mutual funds are required to distribute nearly all of their realized gains each year. Even when reinvested into the funds, those capital gains distributions can trigger significant tax bills for investors who hold mutual funds in taxable accounts. Worse yet, many investors neglect to "step up" their cost basis to account for distributions on which they have already paid taxes--this recordkeeping is complicated!--so they pay tax on the gains a second time, when they eventually sell the fund.