Taxation ranks among the most important considerations when investing in securities and commodities. State governments and the Internal Revenue Service (IRS) levy a variety of taxes against investments, including the taxation of money earned by selling shares such as those held in a mutual fund. The amount of taxes you pay when selling mutual-fund shares depends mostly upon the profit made from the shares and how long you owned them.
Capital gains constitute any money earned from the sale of an asset. According to the IRS, assets include anything of value that a person owns, from furniture and computers to securities such as mutual-fund shares. Two types of capital gains exist, long-term capital gains and short-term capital gains. Short-term capital gains comprise any profit made on an asset owned for less than one year. Long-term capital gains comprise profits made on assets owned for one year or more. Capital gains constitute profit. For instance, if you purchased a share for $15 and sell it for $20, your capital gain is $5.
States and the federal government tax capital gains. As a general rule, states that impose income taxes tax long-term and short-term capital gains at the same rate as the rest of your income. The federal government calculates your net capital-gain income by subtracting all short-term capital losses and long-term losses carried over from the previous year from your long-term gains. The IRS taxes this amount at a lower rate than the rest of your income. The standard capital-gains tax stands at 15 percent in 2011 but changes based on your total income. Short-term capital gains qualify as standard income for federal-tax purposes.
Capital losses occur when you lose money on the sale of an asset. For instance, assume you purchase 100 mutual-fund shares at $25 each, for a total cost of $2500. Due to a decline in mutual-fund value, you sell those shares for $15 each, taking in $1,500. You incur a capital loss of $1,000 ($2,500-$1,500) in this instance. If your capital losses exceed your capital gains, you can deduct losses from your taxes. As of 2011, individuals may deduct $1,500 in capital losses and couples filing jointly may deduct $3,000.
Other Taxes Associated with Mutual Funds
Investing in mutual funds leaves you susceptible to a variety of tax types beyond capital-gains taxes levied against the sale of mutual-fund shares. By federal law, mutual funds must pay out 98 percent of their annual profits in order to remain tax-free. Because of this, mutual funds regularly pay dividends and disbursements to investors. Standard income-tax rates apply to dividends earned through mutual-fund investments, while disbursements constitute a form of capital gains.
- American Century Investments: Mutual Fund Tax Guide
- Internal Revenue Service: Ten Important Facts About Capital Gains and Losses
- The REI Brain: Capital Gains Tax Rates State by State
- Internal Revenue Service: Capital Gains and Losses
- US Securities and Exchange Commission: An Introduction to Mutual Funds
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