Originally Posted By: Vikas
Originally Posted By: Tom NJ
Paper gains are not taxed. Only when you sell them and realize the gain is tax due, and then only on the net realized gains, that is realized gains minus realized losses.
Tom NJ
With reinvested dividends in the mutual fund, you get taxed on the paper gains. This is because the mutual fund itself sells the securities to cover for the people who take the distribution from the mutual funds. Ironically, when the market does not do well, people panic and starts taking money out causing the mutual funds to declare dividends and capital gains.
If the NAV of your mutual fund was $10 yesterday and if it declares dividend of $2 today; the NAV becomes $8. If you re-invest your dividends, your account total in dollar value still remains the same. But you owe uncle sam taxes on $2 immediately. It does not matter if the NAV last year was $15 either!
So smart people invest in stock or indexed mutual funds or better have the investment in tax deferred account. Some of us were not that smart :-(
Yes you are correct that distributions are a taxable event, and if reinvested they are a paper gain. I am retired so I take my distributions.
Tom NJ