Quote:
Originally Posted by Rainger99
However, if the mutual fund has losses during the year, you can’t deduct them because the loss is unrealized.
To claim a loss from your mutual fund investment, you must have "realized" the loss -- that is, you must have sold some or all of the shares before the end of the year. If you have not sold any of your fund shares, your loss is "unrealized," meaning that the loss is not fixed or final -- as long as you still own the shares, their value could go up next week, next month or next year.
However, this doesn’t work with gains. You pay them even if they are unrealized.
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To clarify, the only reason the OP owes tax on the capital gains is because they were distributed to the mutual fund shareholders as a result of individual stock shares being sold within the mutual fund. But, if the overall mutual fund net asset value increased, the OP would not owe taxes on the gain, as long as he did not sell the mutual fund shares. You do not pay taxes on a gain in mutual fund value until you sell the mutual fund shares. You do pay taxes if the fund manager sells individual stocks within the fund and distributes the gains to the shareholders.
So, unrealized gains are not taxed. But capital gain distributions are realized gains. That is why they are taxed.