The hubby and I are pretty happy with our investments, most of which are in mutual funds.
We don't fixate on them, although I have been known to stomp around the house when the market takes a dip. But we do try to stay on top of what's going on in the financial world in general and how that specifically affects our holdings. We do, after all, want to retire sooner rather than later.
So that's why we spent some time yesterday reading the New York Times special section on mutual funds.
Yes, we got our fingers dirty scanning the 10 pages of agate searching for our holdings' quarterly (July 1 through Sept. 30) particulars.
We also gave our eyes a break and checked out the stories.
The one that was of special interest to me was, of course, the article that proclaimed Funds' Tax Bills Are Looking Light.
Mutual fund passed-along taxes: Mutual funds are easier investments for many reasons, not the least of which is that someone else makes the individual moves within a fund to, ideally, maximize its overall earnings.
Those moves include selling assets when appropriate. And that means that fund managers then pass along any capital gains realized from the sales. Essentially, each shareholder has to pay his or her part of the gains realized when the fund sold some stocks that had appreciated.
Such sales within the mutual fund sometimes mean that even when a fund's overall value is lower at year's end than it was on Jan. 1, a fund holder can be hit with a tax bill.
I blogged about such a surprising tax predicament about this time of the year in 2008 in Coping with the tax cost of mutual funds. Yesterday's NYT article noted that such an unwelcome tax cost on less than stellar performing funds also appeared in 2000.
But 2010, says NYT writer Ken Belson, shouldn't pose such an unwelcome mutual fund tax cost:
"This year, the tax burden on mutual fund investors will be relatively light, because many fund managers still have substantial tax losses on their books from previous years that they can use to offset any capital gains accumulated in 2010."
Thank the tax gods for those previous sucky investment years, eh?
'Flash Crash' gains: Another interesting investment tax situation for 2010 is connected to May's "flash crash."
That was the weird move on May 6 when the market inexplicably dropped like a rock. A "huge, anomalous, unexplained surge in selling, it looks like in Chicago," about 2:45 p.m. that day, apparently set off trading based on computer algorithms, which in turn rippled across indexes and spiraled out of control.
Following that event, the Securities and Exchange Commission enacted new rules to automatically stop trading on any stock in the S&P 500 whose price changes by more than 10 percent in any five-minute period.
As soon as they caught their breath that day, those who saw their holdings affected by the flash crash became worried about the event's potential tax implications.
While some investors on that day in May took big losses when the market dove, Robert W. Woods, Forbes' The Tax Lawyer blogger, says that some investors sold stock at a gain because of stop-loss orders triggered by the "whopping and sudden decline in stock prices."
In the wake of that day's market chaos, investors and brokers asked the IRS for help. They want, says Wood, that:
- Investors be allowed to reinvest in the stock they sold;
- The replacement stock be given the same basis as the stock they originally held; and
- Investors be excused from recognizing gain.
Sorry. No such luck.
While the tax agency understands the investors' concerns, in Information Letter 2010-0188, the IRS says it doesn't have the power to allow the tax relief the investors want.
That authority, writes John Aramburu, IRS Senior Counsel, Branch 5, Income Tax and Accounting, lies solely with Congress.
So don't be surprised to see the flash crash tax issues show up as add-ons to one of the many pieces of tax legislation (expiring Bush tax cuts, extenders, etc.) that Congress swears it will consider when it returns for a lame-duck session after the Nov. 2 election.
But whether such a provision — or any tax legislation — will actually pass is anybody's guess right now.
Related posts:
- Coping with the tax cost of mutual funds
- Taking the sting out of stock losses at tax-filing time
- Capital loss deduction increase proposed
- Midyear tax tip #5: Pay attention to your portfolio
- The 12 Tax Tips of Christmas: #1 Sell Assets
- Year-end money moves 2009: Investments
- The investment tax is back!
- Stock options tax tip
- No votes on tax cuts until November
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Adam Heeger
When I think about the May 2010 “Flash Crash” I will admit that of all the problems and concerns it caused capital gains from investors with appreciated stock is not up there on my list. While their plea to the IRS may have its merits the code is very clear when it comes to matter, the sale of the security in this case triggers a capital gain. The IRS taking a hands-off approach and leaving the decision up to Congress is the right choice. Taking a moment to look at history, Congress has passed relief to victims numerous times in recent years. A few that come to mind are tax breaks for victims of flooding in the Midwest a few years back (http://www.preservationnation.org/take-action/advocacy-center/action-alerts/congress-passes-midwest-flood.html) and victims of hurricanes including Katrina, Rita and Wilma (http://www.irs.gov/newsroom/article/0,,id=147085,00.html). Of course this situation is a little different, something tells me that regardless of who wins in November when Congress convenes for the lame-duck session at the end of the year, the headline “Congress once again gives tax break to Wall Street” is not going to resonate well with the already very on edge electorate. In my mind I think the investors are going to be stuck recognizing the capital gain. While they may not be happy an educated investor should have realized that authorizing a stop-loss on a certain security was to protect from a situation just like this. One could argue that these trades should have all been disallowed, and that a policy similar to what has subsequently been put in place to halt trading should have protected investors, though that is an argument for a different blog and out of the IRS’s hands. Furthermore, one can hypothesize many of the affected investors still have quite large capital loss carryovers from 2008 and possibly 2009 that might help offset some of the actual tax burden absorbed as a result of the capital gain recognized during the crash. Finally, there is also the fact that one can speculate what will happen to the tax rates beginning next year. If they increase substantially, selling securities now and resetting one’s basis, by reinvesting in the stock, one might actually be saving some tax burden in the long run.