Replies to post #36145 on A.I.M. Users Bulletin Board (AIMUSERS)

[Toofuzzy]

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

[OldAIMGuy]

Hi Conrad and Toof, Re: Mutual Fund Pass-Through Gains.......

Yes, sadly this is true. Those who've owned the fund a long time can be happier about the distribution than the latest purchaser of the fund.

We see this sort of thing during years with very large gains and losses in the market place. It can be a double whammie if the fund has taken a lot of gains early in the year and then the fund sells off near the end of the year. The Fund distributes the cap gains and the owner of the fund pays Uncle Sam.

This is one reason that taking distributions from mutual funds as Shares can be painful. You might have to sell shares to cover the taxes! Taking the distributions in Cash at least gives you the ability to pay the tax on the gains.

It's always been my opinion that AIM does a better job of reinvesting distributions over time than does Dollar Cost Averaging. The Tax Whammie is just another good reason to take cash instead of shares.

Best regards,