Hi Conrad
It is because of an investment in a pass thru entirety that does not pay corporate tax.
Let's say there are two taxpayers:
One owns a mutual fund a long time and it goes from $50 to $100 and he sells just before a distribution. He will pay tax (at low capital gain rate) on $50
The other buys the fund from the first taxpayer for $100 and the stock distributes a $50 capital gain and drops to $50 (or $49 or $51 whatever) . So now that I think about this, it doesn't sound fair. The government has got its tax twice!
BUT ,,,,,, If taxpayer two was to now sell his stock for around $50 because he is disgusted he will also have a $50 loss to offset the gain and no tax. If instead he holds it till the stock price goes up to $100 so he "breaks even" he will pay no tax at that time because his cost basis is $100.
If the second taxpayer bought just after the distribution, he would have paid $50 and if he then sold it for $50 there would be no tax. If he waited for the stock to go to $100 he would pay tax on his gain.
So does that sound more fair?
Not always
Toofuzzy
Take the road less traveled. It will make all the difference.
