Did the taxman come for you in 2013? If so, you may want to consider how to minimize your tax burden in 2014 – and that means understanding that a losing year could still result in capital gains (and capitals-gains taxes).
Capital Gains Aren’t Realized until Assets Are Sold
A capital gain is an increase in the value of an asset (which includes everything from real estate to stocks and mutual funds). The gain is not realized until the asset is sold. So if your investments have appreciated and you haven’t sold them, you won’t have any capital gains, correct?
Not if you own mutual funds, which are pools of investor funds that are managed by a professional. By law, mutual-fund managers must pass through to shareholders the capital gains (and losses) realized from the sale of securities in their portfolios; so you could end up paying capital-gain taxes on your mutual funds even though the fund overall was down for the year.
One Profitable Stock Can Impact Your Taxes
This happens because one security in a mutual-fund portfolio may be sold at a profit, while the majority of securities in the same portfolio are down. As a result, it would be a losing year for the fund, but the capital gain from the one profitable security would be passed on to all the fund’s shareholders.
For example: Your mutual fund bought a security in 2007 for $15 a share. At the start of 2013, the fund sold the security for $30 a share, an overall profit of $15 a share.
However, during 2013, the rest of the fund’s holdings depreciated. So, you’d end up with a down year for the fund, but would still have to pay capital-gains tax for the security that appreciated.
The lesson: Don’t assume that a losing year won’t result in capital-gains taxes – and plan accordingly for 2014.