All Investors Must Read This and Act Immediately – or You Could Have a Nasty Tax Bill

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Summary:

  1. Since 2015 has been a very volatile stock market and year to date the overall market is about flat. This means a lot of buying and selling, but little gain.
  2. This puts investors in a position for a major tax shock from large distributions but flat performance.
  3. You will get socked with a hefty capital gains distribution that is taxable, but your overall investment might be flat or down.

What to Do Now:

  1. Examine mutual funds in your taxable accounts, looking for early December announcements that show expected distributions.
  2. Decide whether you are better off selling your stock for a gain or loss, before the distribution
  3. DO NOT buy any mutual fund just before a distribution date, “normally called buying the distribution”, it can be a big tax mistake.

Here is a classic example from last year:

Fidelity Select Biotechnology Portfolio (FBIOX) is a well-respected mutual fund consisting of popular biotech stocks such Gilead, Biogen, Alexion etc.

Let’s say you bought 300 shares of this mutual fund in February 2014 @ $226/share = $67,800

On December 4, 2014 the stock price was $239/share, a $13/share gain

However on December 5, 2014 Fidelity declared a capital gains distribution of $23.84/share, you received $7,152 or another 30 shares. You now own 330 shares. Due to this distribution on December 5th the stock closed at $218.42.

Therefore on December 5th you have 330 shares @ $218.42 = $72,078

Your total investment went up by $4,278

However you will pay Capital Gains tax (possibly short-term gains) on $7,152, and you haven’t sold any shares yet.

 

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