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Tax or no tax event?
Old 07-22-2017, 07:59 AM   #1
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Tax or no tax event?

I'm sure this is investing 101, but I'm second guessing the way I believe this works.

Let's say you open an after tax account and spread the dollars over 4 mutual funds. Three of the funds increase in value. One fund stays flat or has a slight loss. You have never rebalanced or transferred dollars between funds. You liquidate the amount out of the flat/neg fund to cash. Is there a tax implication because the entire brokerage account went up in value or no taxable event because the specific fund you liquidated had no value increase. Thanks in advance!
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Old 07-22-2017, 08:02 AM   #2
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Originally Posted by hopeisnotaplan View Post
I'm sure this is investing 101, but I'm second guessing the way I believe this works.

Let's say you open an after tax account and spread the dollars over 4 mutual funds. Three of the funds increase in value. One fund stays flat or has a slight loss. You have never rebalanced or transferred dollars between funds. You liquidate the amount out of the flat/neg fund to cash. Is there a tax implication because the entire brokerage account went up in value or no taxable event because the specific fund you liquidated had no value increase. Thanks in advance!


It is a taxable event but no tax due. The other funds are irrelevant

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Old 07-22-2017, 08:06 AM   #3
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You have a long term/short term capital loss depending on the time period that you held the mutual fund.

However, if the 4 mutual funds were held during a distribution period, you still may have a taxable event occur.
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Old 07-22-2017, 08:11 AM   #4
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funds you keep have unrealized gains and losses, therefore no tax consequence. However, they may generate ongoing taxable income and year-end cap gain distributions that are taxable. additionally, funds you sell have a tax consequence but only if you realize a gain.
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Old 07-22-2017, 08:22 AM   #5
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funds you keep have unrealized gains and losses, therefore no tax consequence. However, they may generate ongoing taxable income and year-end cap gain distributions that are taxable. additionally, funds you sell have a tax consequence but only if you realize a gain.
I would say that it is a taxable event even if you realize a loss. Capital losses are set off first against capital gains then against regular income tax ( up to $3k per year of losses can be set against income tax)
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Old 07-22-2017, 08:32 AM   #6
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Old 07-22-2017, 08:34 AM   #7
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The loss is a "taxable event" in that you likely should file the loss info. It just should not cost you $. You noted other funds have gains which you have not sold. You did not note that any of the MF had any distributions or not, so we assume it did not happen. If they distributed, that would likely be a taxable event depending upon the type of distribution even if you did not trade funds.
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Old 07-22-2017, 08:36 AM   #8
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Quote:
Originally Posted by hopeisnotaplan View Post
I'm sure this is investing 101, but I'm second guessing the way I believe this works.

Let's say you open an after tax account and spread the dollars over 4 mutual funds. Three of the funds increase in value. One fund stays flat or has a slight loss. You have never rebalanced or transferred dollars between funds. You liquidate the amount out of the flat/neg fund to cash. Is there a tax implication because the entire brokerage account went up in value or no taxable event because the specific fund you liquidated had no value increase. Thanks in advance!
As you have defined it, the sale of the fund is a taxable event. However, since the fund had no value increase the gain would be zero and the tax on the gain woudl be zero as well.
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Old 07-22-2017, 10:26 AM   #9
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As you have defined it, the sale of the fund is a taxable event. However, since the fund had no value increase the gain would be zero and the tax on the gain woudl be zero as well.
But the other 3 funds could have done a distribution and tax would be owing on those events, even if no cash was paid to the OP.

This is what I dislike about mutual funds, you get to pay tax, but don't get any cash in your pocket, until you finally sell the mutual fund.
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Old 07-22-2017, 10:36 AM   #10
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But the other 3 funds could have done a distribution and tax would be owing on those events, even if no cash was paid to the OP.

This is what I dislike about mutual funds, you get to pay tax, but don't get any cash in your pocket, until you finally sell the mutual fund.
You do actually get the cash, but you chose to automatically reinvest it back into the fund (or another fund), so you don't really get to keep it for more than a millisecond. It is still taxable event.

Also, sometimes cap gain distributions are done midyear, not only at the end of the year.
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Old 07-22-2017, 11:12 AM   #11
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Originally Posted by hopeisnotaplan View Post
I'm sure this is investing 101, but I'm second guessing the way I believe this works.

Let's say you open an after tax account and spread the dollars over 4 mutual funds. Three of the funds increase in value. One fund stays flat or has a slight loss. You have never rebalanced or transferred dollars between funds. You liquidate the amount out of the flat/neg fund to cash. Is there a tax implication because the entire brokerage account went up in value or no taxable event because the specific fund you liquidated had no value increase. Thanks in advance!
Listen, I think I know what your driving at, in my layman terms you have 4 funds. You sell the fund that started with 10 thousand, its now worth 9 thousand. No you dont owe one penny in taxes. You need to report it. But you will not owe any money. this is the blue collar answer to the question. All this dividend & interest stuff happens weather you sell the fund or not, its all noise.
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Old 07-22-2017, 11:28 AM   #12
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Originally Posted by hopeisnotaplan View Post
I'm sure this is investing 101, but I'm second guessing the way I believe this works.

Let's say you open an after tax account and spread the dollars over 4 mutual funds. Three of the funds increase in value. One fund stays flat or has a slight loss. You have never rebalanced or transferred dollars between funds. You liquidate the amount out of the flat/neg fund to cash. Is there a tax implication because the entire brokerage account went up in value or no taxable event because the specific fund you liquidated had no value increase. Thanks in advance!
Since this is an investing 101 question I'm guessing that you haven't had an after tax account holding mutual funds before. I can only speak for Fidelity and Vanguard as they are the only companies I have owned funds with but I believe it to be true of all such companies.

In February or March usually you will get a set of tax forms for the previous year to include with your tax return. Each fund is treated as a separate entity so you will see fund by fund dividends and capital gain distributions, plus any capital gains or losses from the sale of shares from each fund.
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Old 07-22-2017, 11:38 AM   #13
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You do actually get the cash, but you chose to automatically reinvest it back into the fund (or another fund), so you don't really get to keep it for more than a millisecond. It is still taxable event.
...
+1 you can always chose not to reinvest and take the dividends in cash and use part of the cash to pay the tax and then either save or spend the rest.
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Old 07-22-2017, 06:32 PM   #14
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Listen, I think I know what your driving at, in my layman terms you have 4 funds. You sell the fund that started with 10 thousand, its now worth 9 thousand. No you dont owe one penny in taxes. You need to report it. But you will not owe any money. this is the blue collar answer to the question. All this dividend & interest stuff happens weather you sell the fund or not, its all noise.


Yes...this.
And several other responses answered the question that each fund is independent and the funds in the account aren't tied together. I appreciate the confirmation. That's how I assumed it worked, but wasn't 100%.
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Old 07-22-2017, 06:54 PM   #15
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Originally Posted by hopeisnotaplan View Post
I'm sure this is investing 101, but I'm second guessing the way I believe this works.

Let's say you open an after tax account and spread the dollars over 4 mutual funds. Three of the funds increase in value. One fund stays flat or has a slight loss. You have never rebalanced or transferred dollars between funds. You liquidate the amount out of the flat/neg fund to cash. Is there a tax implication because the entire brokerage account went up in value or no taxable event because the specific fund you liquidated had no value increase. Thanks in advance!
Are you referring to a traditional IRA funded with after tax dollars or a personal, non-retirement account?
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Old 07-22-2017, 07:36 PM   #16
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Are you referring to a traditional IRA funded with after tax dollars or a personal, non-retirement account?


Personal brokerage account.
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Old 07-22-2017, 07:49 PM   #17
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Personal brokerage account.
In a personal account each fund or stock stands alone as far as taxable events.
The fund that was liquidated will have a gain or loss based on price change while you held. In addition, for ALL of the funds, there may be capital gain distributions where there were gains or losses within a fund from the buying and selling of stocks within the fund. The total taxable net gain or loss would be distributed back to the fund holders i.e. you.

Dividends from the funds are also taxable unless they have been elected to be reinvested as the purchase of additional units of the fund.
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Old 07-22-2017, 07:51 PM   #18
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Dividends from the funds are also taxable unless they have been elected to be reinvested as the purchase of additional units of the fund.
Doesn't matter if they are reinvested or not, the dividends are reportable and taxable at the appropriate rate.
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