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Capital Gains in Mutual Funds

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Capital Gains in Mutual Funds

A capital gain or capital loss refers to the change in the net asset value (value per share) of a mutual fund.

Things To Know

  • Capital gains and losses are realized when you sell shares that have risen or fallen in value.
  • They are either short-term or long-term.
  • Long-term gains are taxed at special rates.

How to earn capital gains

You earn a capital gain from your mutual fund when you redeem fund shares that have risen in value. More precisely, a share has a capital gain only when it is sold for more than it was purchased for. If you buy shares of a fund at 10 dollars each, and you later sell them for 14 dollars, you have made a capital gain of 4 dollars per share. It is important to remember that you realize a capital gain only when you sell shares. While they are still in your hands, your profits are only on paper. Therefore, you are taxed on them only when they are sold.

Capital losses

Capital losses are the losses that result when you sell shares that have fallen in value. Obviously, they are not income, but they may result in a deduction for income tax purposes.

Short and long terms

Capital gains (and losses) are either short-term or long-term.

  • Short-term capital gains are gains on shares that have been held one year or less.
  • Long-term capital gains are those that have been held longer than one year.

The difference is crucial, because long-term capital gains are taxed at a lower rate than your regular income.

Long-term capital gains are taxed at 20%, 15%, or 0%. Prior to the tax law changes taking effect in 2018, these rates matched existing income tax brackets. Now they are based upon income levels, and they differ based upon an investor’s filing status as well.