"Phantom" Mutual Fund Gains A Possible Result Of Market Downturn
It is possible for a mutual fund to distribute capital gains even though its return this year is negative. If the fund sold stocks earlier in the year when stocks were higher, the gains on those stocks will be passed on to shareholders if they haven't been already.You can face the same situation in a portfolio of individual stocks; it's not just an occurrence unique to mutual funds. If you sold a stock early in the year, you would still need to report that gain even if what you invested in afterward went down.
This is not as bad as it sounds. If you know you will receive gains and also hold shares of that fund or another that have gone down in value, you can sell some shares to create an offsetting loss. You need to be careful to match long-term gains and losses. You also have to avoid repurchasing the sold fund shares (if sold at a loss) for 30 days or the IRS will disallow the deduction.
But even if you do have some tax to pay, the long term gains tax rates are more favorable than ordinary income rates and you won't have to pay the tax again later.
Of course, if you are in a qualified retirement account, such a s an IRA or 401(k), this is irrelevant. There are no taxable gains to report on transactions within these types of accounts.
If you think you may be facing this situation, now is the time to talk to your investment and tax advisors.