Congressman's Report Says Mutual Fund Investors Are Hit Hard By Capital Gains Tax Law

by Mike Godfrey, Tax-news.com, Washington

25 April 2001

An increasing number of complaints from mutual fund investors has led the Chairman of the US Congress Joint Economic Committee, Jim Saxton, to embark upon a study to examine the strength of their arguments. Released this week, the report - entitled 'The Taxation of Mutual Fund Investors: Performance, Saving and Investment' - has led Congressman Saxton to propose a new law to reform the capital gains taxation system.

The current tax law dictates that any profits or losses from stock transactions must be passed on to the fund shareholders. Investors are required to report those distributions as income regardless of whether or not they have sold any shares of their mutual funds. This results in the obligation to pay capital gains tax on net losses and it is not uncommon for investors to have paid twice on the same gains.

Consequently, some mutual fund investors have incurred taxable capital gains even when they have lost money. This became particularly significant last year when the stock market fell sharply. The Securities and Exchange Commission reported that taxes can reduce the average rate of return on mutual funds by as much as 2.5 percentage points per year. In a press statement released this week, Saxton claimed: 'Last year, many millions of ordinary Americans watched in disbelief as their hard-earned mutual fund investments plummeted in value. This year, they were even more incredulous when they received their statements informing them they owed hundreds or even thousands of dollars in capital gains taxes on their mutual fund investments that fell 20, 30, or even 40 per cent.'

Saxton said his study 'shows the need to change the tax law so that it does not impose punitive taxes on ordinary middle-class taxpayers attempting to save for retirement, education, medical and other needs.' He argued: 'This feature of the tax law is one of the worst examples of how our tax system is biased against personal saving and investment, and is literally economically counterproductive.'

Saxton has proposed legislation that would defer taxes on most capital gains distributions until a mutual fund investor actually sells his shares. He declared: 'Now is the time to fix this tax problem and protect taxpayers from being whipsawed again in the future. Legislation addressing this problem has been introduced and would provide tax relief to all affected taxpayers, totally eliminating this problem for about 85 per cent of all mutual fund shareholders ... this legislation ... would provide a deferral of taxes through a partial income exclusion of capital gain distributions made by mutual funds. Most taxpayers would not even have to report these distributions on their tax forms, and record-keeping would be quite simple and straightforward.'

Recommended