- 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.
- This puts investors in a position for a major tax shock from large distributions but flat performance.
- 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:
- Examine mutual funds in your taxable accounts, looking for early December announcements that show expected distributions.
- Decide whether you are better off selling your stock for a gain or loss, before the distribution
- 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.