Capital Gains
 

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?

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.

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.)

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.

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

Wellington Admiral...

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.

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

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

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.

This is a pretty good explanation.


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

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

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

Why you buy ETFs

Correct. You get no benefit from the lower capital gains tax rates in an IRA. All gains are taxed at your ordinary income tax rate, but only when you take an IRA distribution.

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.

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.

But if the fund manager sells stocks at a loss, why aren’t the losses passed along to the shareholders?

I believe that losses are passed on to the shareholders, but I don't remember that ever occuring with my mutual funds. The fund manager doesn't itemize the individual stocks that were sold, so you only get a consolidated total of the losses and the gains, which usually results in a net capital gain distribution, not a net loss.

You say “usually” results in a net capital gain distribution. There must be some years where a mutual fund has a net loss. But I don’t think I have ever been able to deduct those.

I don't know because I only invest in index funds. I have never seen a net loss, but, it could be possible. I think the fund managers would try to avoid net losses because capital losses can only be used to offset ordinary income of up to $3K per year. So, a shareholder with a large capital loss could take multiple years to take advantage of a large loss. It may not be a good selling point for the fund.

Capital Gains
 

Retiredguy123 is correct. Note, too, that you can offset the Capital Gains Distributions, if you have other losses on stock or funds you sold last year. It is always good to check your funds in mid-December each year to see if the funds will report Capital Gains Distributions (Your advisor should tell you that). If they do, you can offset them by selling stocks/funds with losses.

Sell the investment and the loss will outweigh the gain.

I invested about 45 years ago when i saw what Vanguards expense ratios were. Put abut 150k in 10 different index funds and now even with 2021 and 2022s lagert performances their now around 2 mill. Cant beat Vanguard if you dont sell and reinvest always.

3k a year max loss claim though....

Your Dividends are Taxable!!!!!

Nice response. Good info.

ain't the government great.......;o(

I started investing back in the early nineties. Quite a learning curve but after a couple years it became very very obvious that mutual funds were one of the biggest (I don’t know what word to use rip-off, maybe even scam but at minimum a very poor way to invest). High fees, very poor performance and things like you have just pointed out. There are only a few good ones but most are not consistent.
Index funds and ETF are far better.individual stocks are the best way however. So my advice to anyone that asks, me for tips or advice on investments is: take the time to study and learn about investing. Pick your own sticks or ETFs. It’s actually fun and for us older folk great for the mind. It’s not very difficult to outperformed mutual funds by big margins.

///

I direct that all of my capital gains distributions and dividends be transferred into my money market account. No automatic reinvestment in additional shares. That way, I always have the same number of mutual fund shares. I can decide if or when I want to purchase additional shares. It may not be for everyone, but it works for me.

Not true. If you had a $20k gain and a $20k loss in the same year, the loss wipes out the gain. if you had more losses than gains, you carry over the losses and can use $3k of those losses each following year until they are used up.

Some poster always posts that you should sell your funds and buy etf’s instead. Why? There aren’t any more etf’s than active/index funds and you won’t make anymore $$$ in etf’s than in the other funds. The main advantage of an etf is how/when you buy and sell them, etf’s are traded like stocks, instantly vs waiting for the close of the market.
I got out of managed funds over a decade ago because of the expense costs and the turnover within the fund. Look at your active funds and you can see a huge turnover ratio (I’ve seen 400% before) and you pay for this turnover. I’m a boglehead, all index funds except for a couple stocks.
I sold everything in my non-taxable accounts over a year ago because I saw the country is in such a mess.
Now I get in a stock or index fund when I see a rally coming and sell when I see the future looks bleak.
For example, bought apple 3 weeks ago, went up over $20 a share and sold it all last week before it started going down. I’ve done this off and on in a couple of index funds over the last year with big gains. You need to be more diligent in your investing these days.
I’ve learned: Pigs get slaughtered in the market and leave your emotions out of investing

UsuallyLurking to me made a lot of sense, but then again look at the way our economy is going. Pretty Sad!

Loved it!
 

:bigbow::bigbow::bigbow::bigbow:

I have found that during the up’s and downs of our financial life that it’s more fun when we are loaded $$$$$. Too much to manage at my advanced age of 65. I made a killing in the stock market in the beginning and then I turned to mush.
Fortunately a man has to know his limitations and my stock and day trading life is almost over. We have more than we need and feel blessed that I got outta dodge investing wise while the getting was good. We gave our three boys a nice hit before we came to The Villages 7 years ago. I’d rather see them do good while I’m still here than to leave it to them after we’re gone.

Investing, phooey! I’m out of the game.
No more loansharking anymore either!

"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)"


A couple of posters here, if one were to believe their unprovable/anonymous claims, are absolute geniuses and always seem to buy at the absolute lows - and sell at the absolute peaks.

Hmmmm, yeah...OK. LOL

OUCH. Last year, 2021-2022,the S&P lost 18.11% You can think of that as average loss. In a fund, any fund you pay a fee to the manager and staff. Easy to research, you want to decide if the manager and staff are worth what you pay them. In a down year, a managed fund should do better than a simple average.
To buy the s&p there are several ETFs that simply track the average.
SPY is one.
As far as Vanguard, they are traditionally the lowest fees and they claim, probably true, lower fees means higher net returns. I would call Vanguard and ask about Admiralty shares. You would think if you qualify you automatically get
Admiralty shares, I'm not sure that is so. Admiralty shares to qualify, some funds it is 50,000 some are less. Again you can research this on the internet.
It is the same fund but the management fee is roughly 30% lower.

The MATH. Many people do not understand math. For me I have to do it on my calculator to see. If, you had 10,000 and lost the average 18.11% you now have 8189 to get whole you need to make 8189 plus 23%=10072.47.

What to do? Beware of people offering advice. What is in it for them? I do not offer advice. Based on experience, if it works out well the person who did what you told them will brag how smart THEY are. If, they loose money, YOUR advice is poor and it is your fault they lost money.

That is not so. BIAS is sadly obvious. We should all be aware from experience, when you talk money most will not tell you the truth, most do not know the truth.

As stated in a previous post last year the S&P average of 500 stocks LOST 18.11%. I can HONESTLY state I lost less than that. It was also the first year in 15 that I lost money. I beat the S&P last year and I still lost more money than I will state.