Tax Implications on Mutual/Index Funds & ETFs

Apple Aussii
Jun 7 18 Comments

Tax rates and how they are applied on Stocks are obvious. For short term sell within 1 year, taxed at ordinary income rate of the individual. For long term sell post 1 year, taxed at 10%-20% based on the individual’s highest tax bracket.

However, I’m not sure how the following are taxed. Please enlighten!

1. Buying and Selling Mutual/Index Funds
2. Buying and Selling ETFs
3. Periodic Dividends or Interest payments from funds

Thanks!!

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TOP 18 Comments
  • Apple Aussii
    OP
    Mutual funds are actively managed throughout the year and so the manager would be trading either a short held or long held stocks within the fund isn’t? How are those taxes calculated and how it is shared with the mutual fund holders? If they are spread across, does these get reported or just deducted from the returns reported?
    Jun 8 7
    • New / Other
      DuQvV7y

      New Other

      BIO
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      DuQvV7ymore
      The internal sales of the fund are not individually reported to you. Your taxable event is the sale or purchase of the fund itself.

      It’s just like how Apple’s purchase of companies and costs are not individually reported to shareholders.

      Your taxable event is the sale of the fund.
      Jun 8
    • Apple Aussii
      OP
      Right on again. Thank you! So when funds report past year earnings, it’s including all tax costs. But other fund expenses will still be excluded from the reported returns and thereby the real return will be lesser, correct?
      Jun 8
    • Expedia legitly
      Except, mutual funds distribute capital gains (or maybe losses) at end of year to holders of record and you pay taxes on those like any other gain. when you take as stock, you get more shares and your overall cost basis adjusts
      Jun 8
    • New / Other
      DuQvV7y

      New Other

      BIO
      Did stuff. Hustled hard. Retired
      DuQvV7ymore
      @OP like a company you’re not getting all the profits (ex-expense of a mutual fund). That’s the difference between a co-op fund (or an ETF to some degree) and a mutual fund.

      Just like Apple decides what dividends to declare. So do most mutual Funds. Scouring their portfolio tells you what they keep in reserve etc. but as every company that is actively managed you’re not getting every ounce of profit passed through to shareholders each year.

      The point is, the mutual funds profits has no taxable concern to you. It’s what they declare as dividend to you that you pay taxes on.

      So, Apple’s Federal tax rate (for instance) does not factor into either your salary or what tax you pay on Apple shares (if you own any).

      Also, Apple is not obligated to return all profits as dividend. And they don’t. No one does.
      Jun 8
    • Apple Aussii
      OP
      Thank you! It’s a good way to perceive MF as a company entity to understand these concepts!
      Jun 8
    • New / Other
      DuQvV7y

      New Other

      BIO
      Did stuff. Hustled hard. Retired
      DuQvV7ymore
      Yup, that’s the idea.

      A mutual fund is a for-profit company created to make money by investing in other financial instruments (stocks, bonds, options, commodities etc) using funds provided by their shareholders.

      It’s financial chicanery. Build nothing. Put other people’s money at risk. Profit lots.

      And that’s why ETFs are better. Way better. But I’m sure you already knew that.

      Cheers.
      Jun 8
    • Apple Aussii
      OP
      All I know about ETFs are, 1. They are passively managed and mostly follow the indices this low cost/expense ratio. 2. Can be traded during the day just like stocks and unlike MFs end of the day based on Nav. Is there any other advantages of ETFs? Also how then ETFs and Index based Mutual fund is different? (Sorry to drag this post’s topic but your answers are enlightening).
      Jun 8
  • Facebook veVX74
    1,2 same as stocks
    3 depends whether qualified dividends or not. Qualified dividends are taxed at long term capitol gains rate non qualified are taxed at income tax rate
    Jun 8 5
    • Apple Aussii
      OP
      Thanks. How to differentiate qualified vs non qualified dividends?
      Jun 8
    • New / Other
      DuQvV7y

      New Other

      BIO
      Did stuff. Hustled hard. Retired
      DuQvV7ymore
      Your brokerage will report this information to you on a Form 1099-B
      Jun 8
    • Apple Aussii
      OP
      Sure but on what basis dividends are classified so that we can plan appropriately.
      Jun 8
    • New / Other
      DuQvV7y

      New Other

      BIO
      Did stuff. Hustled hard. Retired
      DuQvV7ymore
      Ordinary dividends - Items held less than 60 days. Taxed as regular income.
      Qualified dividends - items held over 60 days. Taxes at LTGC rates.

      Why the difference? So you don’t go using an ex-div-date strategy to pull in dividends and have it taxed at lower rate.
      Jun 8
    • Apple Aussii
      OP
      Thank you! To the point...
      Jun 8
  • Accenture bindok
    Location?
    Jun 8 3
    • Apple Aussii
      OP
      Texas
      Jun 8
    • New / Other
      DuQvV7y

      New Other

      BIO
      Did stuff. Hustled hard. Retired
      DuQvV7ymore
      I’m not sure why @bindok asked this as it is not pertinent to OPs question.
      Jun 8
    • Apple Aussii
      OP
      Probably to get to know the state tax part
      Jun 8

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