More About Mutual Funds and Taxes

BY RICHARD P. SNYDER

“A Taxing Problem” ( JofA, May00, page 51) discussed the need for investors and their accountants to consider the impact taxes have on their total returns earned in mutual funds. The article provided some practical advice for executing sound tax strategies (for example, to avoid purchasing a mutual fund just before it is due to make a capital gains distribution).

However, one item is incorrect: “Most fund managers tend to sell stocks with the lowest cost basis…to boost returns.” Although I’m not sure that most fund managers tend to sell stocks with the lowest cost basis, I am certain that the tax lots they sell have no impact on a fund’s total return. Selecting different tax lots affects the character of the gain, not the amount. In this instance, “character” categorizes gains as either realized or unrealized. Therefore, the total return of a fund, as currently calculated on a pretax basis, is not affected by tax lot selection. The pretax total return of a fund will be the same regardless of the tax lot selection method (for example, FIFO or specific identification).

It should be noted that when aftertax returns are required, the tax lot selection will affect the fund’s aftertax return.

Richard P. Snyder
Milwaukee

SPONSORED REPORT

2018 financial reporting survey: Challenges and trends

Learn the top reporting challenges that emerged in a survey of more than 800 finance, accounting, and compliance professionals across the world, and compare them with your organization's obstacles.

PODCAST

How the skill set for today’s CFO is changing

Scott Simmons, a search expert for large-company CFOs, gives advice for the next generation of finance leaders and more, including which universities are regularly producing future CEOs and CFOs.