U.S. mutual funds hit investors with big capital gains
BOSTON (Reuters) - Capital gains pain has arrived for U.S. mutual fund investors.
U.S. mutual funds are disclosing some whopper capital gains distributions, anywhere from 6 percent to 60 percent of net asset value, underscoring stock market success and a potential year-end tax headache for investors. The year-end distributions are among the largest seen since the start of the financial crisis in 2008, according to U.S. regulatory filings.
"In many respects, it's a good news story," said Joel Dickson, a senior investment strategist at Vanguard Group.
The capital gains reflect stock mutual funds taking profits from selling securities in their portfolios, exceeding losses from previous years. Meanwhile, Dickson said capital gains distributions from bond funds are actually down a bit in 2013.
Fidelity's $16 billion Magellan Fund plans to distribute capital gains of $5.52 a share in 2013. That is up from just 2 cents a share in 2012, according to fund disclosures. So far in 2013, the fund is up 32 percent.
Boston-based Fidelity, the No. 2 U.S. mutual fund company, said it is difficult to broadly characterize distributions from funds. But many Fidelity stock funds will distribute gains to investors this year, Fidelity spokesman Charlie Keller said.
Shareholders, except for those in tax-deferred accounts such as 401(k) plans, are required to pay taxes on the distributions, regardless of whether they are paid out in cash or reinvested in more shares. Short-term capital gains are taxed at ordinary income tax rates while long-term gains are taxed at a maximum rate of 20 percent.
There are some oddities in the mix. For example, gains from the sale of certain commodities such as gold bullion are taxed at a 28-percent rate regardless of the taxpayer's federal income tax bracket, according to a primer from money manager Waddell & Reed Financial Inc.
The final tally for investors is memorialized on the Internal Revenue Service Form 1099-DIV, which is typically mailed out in January.
Some actively managed stock funds at Vanguard Group, the largest U.S. mutual fund company, are paying gains approaching 10 percent of net asset value, Vanguard spokesman John Woerth said. He called that 10 percent range sort of the unofficial threshold for what might be considered a large distribution.
At BlackRock Inc, the $4.3 billion Capital Appreciation Fund plans to distribute gains to shareholders of up to 15 percent of the fund's average net asset value, according to the company's projections. And the distribution payout at the small BlackRock Large Cap Growth Retirement portfolio could top 60 percent, according to company estimates.
Vanguard's online tax center offers a way to sidestep a big capital gains distribution before investing a large amount in a mutual fund. If the gains represent a large portion of the fund's net asset value and the record date of the next capital gains distribution is near, investors may want to delay their purchase until after the record date.
"Otherwise, you'll 'buy the dividend' and that can cost you money in taxes," according to Vanguard's tax center.
Tax experts also warn that if you sell a fund at a loss to avoid the distribution, be careful not to buy the fund back within 30 days because you will run awry of IRS wash sales rules.
(Reporting By Tim McLaughlin; Editing by Maureen Bavdek and Krista Hughes)