Tax implications liquidating mutual funds
Shareholders who sell mutual fund shares for profit, having held the shares for more than one year, receive long-term capital gains.
The gains are the difference between the cost basis, or purchase price, and the sale price of each share.
Investors who own a share for less than a year, and sell it for profit, experience what the IRS calls a capital gain.
This means the value of the share rose and the shareholder made a profit by selling it.
Since dividends are paid from the fund, the share price decreases after the dividend distribution occurs, and shareholders are taxed on the distribution.
People who buy shares just before the distribution date don't benefit from the dividend accumulation, because it occurred before they bought the shares.
A "wash sale" occurs if you sell an investment and purchase the same or a "substantially identical" investment within 30 days before or after the sale.
You will receive a Form 1099 at the end of the year from your fund company listing any capital gains distributions.
Before you liquidate your mutual fund, pay attention to the possible costs involved, including taxes, to avoid any negative financial surprises.
Traditionally, mutual funds were sold with an upfront sales charge, with no additional cost to sell the fund.
B shares typically charge a fee on sales that declines depending on the time you have owned the fund.
Sales charges in the first year after purchasing the fund are usually 5 percent, declining to zero after six or more years.