Capital Gain double taxation

Submitted by BruceM on Fri, 2023-08-25 20:46

Hello
Sorry to post a non-IRA question, but I can’t find anywhere else to post this.

Let’s say I buy 100 shares of abcdx mutual fund and when I do the small cap growth fund has no unrealized gains. I pay $10/share. 2 years later I sell the shares for $12 per share with the $2/share being entirely unrealized long term capital gains, which I must claim on my tax return as a LTCG.

Another investor buys shares of the fund for the $12/share and in that year, the fund sells the stocks with the unrealized gain which are distributed that year and so will be reported as a distributed capital gain to the new owner.

Question: isn’t this a form of double taxation where the gains, both unrealized and then realized are treated as capital gain inocme twice?

Thanks for any help in understanding this.

BruceM



Submitted by Alan - IRA critic on Fri, 2023-08-25 21:33

Temporarily the IRS collects CG taxes twice, but the fund distribution will reduce the share value back to $10 and when the second investor sells the fund there will be a cap loss of $2 that offsets the gain of  $2 to the second investor. Of course, these transactions might occur in different tax years.

Submitted by BruceM on Sat, 2023-08-26 15:49

I put this question to a tax-prep friend who explained it this way.The appreciation in the security (open end MF in this case) is nothing more than appreciation in value, whatever the cause, and selling for $2 per share in LTCG is not connected to the unrealized capital gain being composed entirely of net weighted share appreciation in the fund. The IRS doesn’t care what caused the appreciation. Consider a closed-end fund. In the same situation, let’s say the NAV of the underlying stocks in the fund over the same period actually declined but the market put a higher value on the fund shares such that the shares sold at a premium to NAV, up to $12 per share when they are sold.  The LTCG would be treated exactly the same.

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