Ready for a Big Capital Gains Tax Bill?

I didn’t sell any shares… Why did I get a tax bill?!?!?

If you own mutual funds, you may have received a bill for capital gains tax, even if you didn’t sell your shares. Why?

Mutual fund managers are “active” stock pickers that are constantly buying and selling to try and beat the market. Each of these transactions is a taxable event.

In 2024, stocks are up a lot. That means there are lots of gains in the stocks that the PMs own. This alone wouldn’t be an issue. But there is another problem: massive outflows from actively managed mutual funds as people move their money to passive index funds instead.

To raise the cash to pay these shareholders that are leaving, the PMs have to sell securities.
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So the perfect storm of selling positions at gains to meet shareholder redemptions means you are on the hook for paying those taxes. Even if you didn’t sell.
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The solution? Passive index funds. In addition to saving money on fees, and having better performance than their actively managed mutual fund comps, they are more tax efficient.

ETFs have a unique way to buy and sell securities. ETFs use creation units that allow for the purchase and sale of assets in the fund collectively. This means that ETFs usually don't generate the capital gains distributions that mutual funds do, and therefore don't see the tax effects of those distributions.
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Interested in learning more about tax-efficient investing strategies? Click Book A Meeting.

You may owe a large capital gains tax payment, even if you didn’t sell any shares.