[roob1]

I invested 200K in a Vanguard mutual fund, and at year's end (2021 and 2022), it was valued at approx. 165K. Both years it was reported I had about 10K in capital gains. How can I have capital gains (and tax liability) when the investment value is less than I invested?

[retiredguy123]

The fund manager sold some of the individual stocks within the fund at a higher price than when they were originally purchased. It's called a capital gains distribution. You also could have earned dividends on the stocks within the fund. Both the capital gains distributions and the dividends are taxable income to you. They will show up on the Form 1099-DIV. The only way to take advantage of the $35K loss would be to sell the mutual fund shares and claim a loss.

Note that you have an option to reinvest the dividends and capital gains distributions by automatically purchasing additional mutual fund shares, or you can take the income as cash. But, in either case, it is still taxable income.

[UsuallyLurking]

Capital gains (and losses) are based on transactions that occur during the year. The value of the fund reported at the end of the year is the market value at the time. You didn't give us the details of what the mutual fund is (and I couldn't tell you the details about the ones I have), but an example could be that the fund sold a stock bought way back when for a 10K (capital gains) profit and replaced it with another stock that has since gone down in value by 10K. Since the second stock is still in your portfolio there is no capital gains loss but the end-of-year value of the fund is the same as at the start of the year. (CPAs in the room feel free to jump in.)

[Fltpkr]

Originally Posted by roob1

I invested 200K in a Vanguard mutual fund, and at year's end (2021 and 2022), it was valued at approx. 165K. Both years it was reported I had about 10K in capital gains. How can I have capital gains (and tax liability) when the investment value is less than I invested?

If you don't mind sharing, which Vgd fund was that?

If a number of investors leave a particular fund at the same time it can force the manager to sell assets to pay the liquidating shareholders, and this can result in unexpected capital gains. I know this has happened at least once in the recent past in one of Vanguard's target retirement funds.


Thanks.

[retiredguy123]

Originally Posted by Fltpkr

If you don't mind sharing, which Vgd fund was that?

If a number of investors leave a particular fund at the same time it can force the manager to sell assets to pay the liquidating shareholders, and this can result in unexpected capital gains. I know this has happened at least once in the recent past in one of Vanguard's target retirement funds.


Thanks.

That is why it is best to invest in index funds. I use the S&P 500 Index fund. It is very "tax efficient" because most investors are long term investors, so the fund has very little turnover.

[manaboutown]

Perhaps stocks were sold to fund redemptions.

Some investors are switching to ETFs for a number of reasons. Those can be a taxable events. How mutual funds & ETFs are taxed | Vanguard

[roob1]

Wellington Admiral...

Originally Posted by Fltpkr

If you don't mind sharing, which Vgd fund was that?

If a number of investors leave a particular fund at the same time it can force the manager to sell assets to pay the liquidating shareholders, and this can result in unexpected capital gains. I know this has happened at least once in the recent past in one of Vanguard's target retirement funds.


Thanks.

[CoachKandSportsguy]

doesn't matter which fund, its active management behavior within the fund which is passed onto the shareholder. What makes an active management fund so difficult at tax time, is that unless you track the gains and losses within the fund during the year, which may/may not be public, you can get hit with a huge tax gain at year end, and you have to pony up the tax payment to the IRS, without being able to plan for it. . or have the funds to pay it without selling shares.

its the curse of being investment successful. .

[retiredguy123]

Originally Posted by CoachKandSportsguy

doesn't matter which fund, its active management behavior within the fund which is passed onto the shareholder. What makes an active management fund so difficult at tax time, is that unless you track the gains and losses within the fund during the year, which may/may not be public, you can get hit with a huge tax gain at year end, and you have to pony up the tax payment to the IRS, without being able to plan for it. . or have the funds to pay it without selling shares.

its the curse of being investment successful. .

Another reason to invest in index funds. Not actively managed. Most actively managed funds cannot beat the stock indexes anyway.

[Caymus]

Originally Posted by CoachKandSportsguy

doesn't matter which fund, its active management behavior within the fund which is passed onto the shareholder. What makes an active management fund so difficult at tax time, is that unless you track the gains and losses within the fund during the year, which may/may not be public, you can get hit with a huge tax gain at year end, and you have to pony up the tax payment to the IRS, without being able to plan for it. . or have the funds to pay it without selling shares.

its the curse of being investment successful. .

Plus, if you are on Medicare, the timing makes it more difficult to avoid IRMMA penalties.

[Boomer]

Originally Posted by CoachKandSportsguy

doesn't matter which fund, its active management behavior within the fund which is passed onto the shareholder. What makes an active management fund so difficult at tax time, is that unless you track the gains and losses within the fund during the year, which may/may not be public, you can get hit with a huge tax gain at year end, and you have to pony up the tax payment to the IRS, without being able to plan for it. . or have the funds to pay it without selling shares.

its the curse of being investment successful. .

Yep. Mutual funds outside an IRA can give you a surprise kick in the bottom at tax time, especially if you’re not aware of how the taxes work.

That is one of the reasons I have not used mutual funds since before I retired when mutual funds were the only choices within the 403(b) plan that was available. . Well, that and annuities that were hawked by every local sales guy who could get on the list and then would sometimes actually show up at my house. (I knew them.) Those guys never got me though.

I did have a big ol’ time putting my workplace plan, mutual fund money into tech funds in the ‘90s. I remember one that was returning over 100%. Yep. I sure did dance with that dot-com bubble. So much fun while it lasted. Then….POP!

That big POP! was the most valuable education I have ever had — even though I do have a couple of pieces of paper with my name on them. I have talked about this experience before on here, and also explained that I had not bet the whole farm, just the butter and egg money. That big POP! did not scare me away from the market. But it did yank a knot in my tail and taught me not to be guilty of hubris. I had been flying too close to the sun.

I have noticed over the years (too many) that I have been on TOTV that when it comes to posting in the investment forum, I seem to be the only one who ever admits to having lost money in the market. I am a woman. None of the men who post about investing ever seem to lose money. (chuckle)

I rolled the 403(b) into a self-directed, traditional IRA as soon as I retired — where it still resides today in the Boomerfund, of which I am the manager.

As manager of the Boomerfund, I lose some. I win some. But overall I am happy that I am retaining control of buys, sells, and whatever I can do to not get tax surprises, via RMD time. For instance, I never have put myself in the position of having to sell stock to pay taxes. I maintain a moat of cash around the stocks for that purpose and also because I think it is generally a good idea to maintain a moat of cash — for various reasons — like having a little cash on hand for times like when the old bull stumbled in 2020 and handed me a buying opportunity.

So far, I have not invested in Beanie Babies or Franklin Mint plates or Longaberger baskets…….And I don’t have to pay myself a percentage for management, win or lose.


OP, you have some good explanations of what happened to you from the earlier posters here in this thread, including the one that calls attention to how those tax implications can make it harder to dodge IRMAA.

(Geez. I can always tell when I am procrastinating because I divert from what I should be doing and start writing long posts on TOTV — or sometimes I like to engage is useless arguments — which make good exercise in tightrope walking.

Anyway, my office is a mess and our tax stuff needs to get together, and I need to get myself together, so I am not even going to try to organize whatever I just wrote here. I see I went off track a bit with my history of my breakup with mutual funds, but, oh well…… Seeya later.)

Boomer

[kkingston57]

Originally Posted by roob1

I invested 200K in a Vanguard mutual fund, and at year's end (2021 and 2022), it was valued at approx. 165K. Both years it was reported I had about 10K in capital gains. How can I have capital gains (and tax liability) when the investment value is less than I invested?

A lot of good explanations and has happened to me a lot. Before I turned 65 these gains cost me a lot more due to change in my income when I was in the ACA health insurance. In my mutual fund capital gains vary and were much higher in 2021. Not complaining since fund went up 30% that year.

[Rainger99]

This is a pretty good explanation.


https://www.troweprice.com/content/d...tributions.pdf

[roob1]

Same scenario but fund is in an IRA, when would you pay those capital gains taxes?

Originally Posted by retiredguy123

The fund manager sold some of the individual stocks within the fund at a higher price than when they were originally purchased. It's called a capital gains distribution. You also could have earned dividends on the stocks within the fund. Both the capital gains distributions and the dividends are taxable income to you. They will show up on the Form 1099-DIV. The only way to take advantage of the $35K loss would be to sell the mutual fund shares and claim a loss.

Note that you have an option to reinvest the dividends and capital gains distributions by automatically purchasing additional mutual fund shares, or you can take the income as cash. But, in either case, it is still taxable income.

[tuccillo]

There aren't any capital gains for an IRA. You pay taxes when you cash in as ordinary income minus the basis, if applicable.

Originally Posted by roob1

Same scenario but fund is in an IRA, when would you pay those capital gains taxes?