House Bill Would Allow Tax Deferral On Mutual Fund Gains

by Mike Godfrey, Tax-News.com, New York

04 February 2003

US Congressman Jim Saxton (Rep. New Jersey), House Chairman of the Joint Economic Committee, last week introduced a bill into the House of Representatives to provide a tax deferral for middle-income shareholders on mutual fund capital gain distributions. The legislation, HR 496, provides a deferral of taxes on capital gain distributions of up to $3,000 for individuals, and $6,000 for joint filers. Similar legislation was co-sponsored by 70 members of the House in the previous Congress.

"The current tax treatment of mutual fund shareholders regarding capital gain distributions is illogical and unfair," Saxton said. "Under current law, mutual fund shareholders must pay taxes on capital gains realized by mutual funds even if they have not sold one mutual fund share. Furthermore, they pay such taxes even when the value of their shares has plummeted, as in recent years.

"In other words, when mutual funds generate huge capital gains, the shareholders get slammed even when their own unsold shares have declined in value. And when the mutual funds incur huge capital losses, as they have recently, these losses cannot be passed on to shareholders. This is a 'heads I win, tails you lose' situation for the government.

"My legislation would remedy this inequity my providing a tax deferral on capital gain distributions large enough to cover all distributions of over 90 percent of shareholders. Mutual funds are an important saving and investment vehicle for middle-income Americans, and the punitive tax treatment of these taxpayers is unnecessary and counterproductive," Saxton concluded.

Jim Saxton's bill would allow fund shareholders to postpone paying taxes on qualifying gains until they actually register the gain by selling the fund. Morningstar, the mutual fund tracker, supports the bill and has encouraged fund investors to back it. "Eliminating the mutual fund penalty is a good plan," said Russel Kinnel, a senior analyst at Morningstar. "It would encourage savings by simply requiring fund investors to pay taxes on their investment just like stocks," he said.

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