Are mutual funds taxed if not sold? (2024)

Are mutual funds taxed if not sold?

Bottom line. Taxes on mutual funds can be complicated because you can be taxed on dividends and the fund's gains even before you've sold your shares. Of course, you'll also be taxed on any gain in the fund's value when you decide to sell.

As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

Capital gains are realized anytime you sell an investment and make a profit. And, yes this applies to all mutual fund shareholders even if you didn't sell your shares during the year.

Distributions and your taxes

If you hold shares in a taxable account, you are required to pay taxes on mutual fund distributions, whether the distributions are paid out in cash or reinvested in additional shares.

You don't report income until you sell the stock. Your overall basis doesn't change as a result of a stock split, but your per share basis changes. You'll need to adjust your basis per share of the stock. For example, you own 100 shares of stock in a corporation with a $15 per share basis for a total basis of $1,500.

Investing in mutual or exchange-traded funds means you might receive a capital gains distribution regardless of whether you sold any shares. Be prepared to pay taxes on any capital gains distributions you receive.

Like income from the sale of any other investment, if you have owned the mutual fund shares for a year or more, any profit or loss generated by the sale of those shares is taxed as long-term capital gains. Otherwise, it is considered ordinary income.

The tax doesn't apply to unsold investments or unrealized capital gains. Stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value. Most taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized.

Do I pay taxes twice on mutual funds?

Mutual funds are not taxed twice. However, some investors may mistakenly pay taxes twice on some distributions. For example, if a mutual fund reinvests dividends into the fund, an investor still needs to pay taxes on those dividends.

If you have money in mutual funds, using some of it to pay off debt, especially debt with high interest rates, might seem like an attractive option. But cashing in your mutual funds isn't always the best way to become debt-free, and, depending on how you hold those funds, you could end up with a big tax bill.

If you redeem your equity funds within one year of investment, you must pay short-term capital gains tax at 15%. If you redeem after one year, you must pay long-term capital gains tax at 10% on the gains exceeding Rs. 1 lakh in a financial year.

The only way to avoid receiving, and paying taxes on, a fund's capital gain distribution is to sell the entire position before the record date.

Switching of mutual funds is taxable under capital gains, depending on the type and duration of the fund. What is a switch fee for mutual funds? There is no switch fee for mutual funds, but stamp duty of 0.001% is applicable on the transfer of units of equity oriented or hybrid schemes.

Mutual funds and exchange-traded funds can be quite tax-efficient, too; the key is to choose carefully. For equity investors, traditional index funds and ETFs tend to do a good job of limiting taxable capital gains; tax-managed mutual funds can also be a good choice.

Do you pay taxes on stocks you don't sell? No. Even if the value of your stocks goes up, you won't pay taxes until you sell the stock. Once you sell a stock that's gone up in value and you make a profit, that's when you'll have to pay the capital gains tax.

In many cases, you won't owe taxes on earnings until you take the money out of the account—or, depending on the type of account, ever. But for general investing accounts, taxes are due at the time you earn the money. The tax rate you pay on your investment income depends on how you earn the money.

Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the “tax basis.”

You owe capital gains taxes on the profit that you make whenever you sell an investment asset or receive qualified dividend payments. So, for example, say you bought into a mutual fund at $100 per share and you sold it for $150. You would owe capital gains taxes on the $50 of profit that you collected from that sale.

What kind of mutual fund is tax exempt?

Mutual funds are not tax-free except for ELSS (equity-linked savings schemes or tax-saving funds) and some retirement funds. As per the Income Tax Act, under Section 80C, you can claim a deduction of up to Rs. 1.5 lakh for investments made in ELSS and can save taxes up to Rs. 46,800.

Equity Mutual Fund: SWP Example

The gains on your investments if withdrawn in the first year are treated as Short Term Capital Gains (STCG) and taxed at 15%. If the investment is redeemed after the first year, the gains are called Long Term Capital Gains (LTCG) and are taxed at 10%.

A tax on capital gains only happens when an asset is sold or "realized." Investors can also have unrealized and realized losses. An unrealized loss is a decrease in the value of an asset or investment you own but haven't yet sold—a potential loss that exists on paper.

Depending on your situation, you may need to pay long-term capital gains tax or short-term capital gains tax. If you've held the mutual fund for less than a year, that amounts to a short-term capital gains tax. A short-term capital gain will count as a part of your ordinary income.