New Bill Aims To Ease Tax Burden For Mutual Fund Investors

by Mike Godfrey, Tax-News.com, Washington

08 May 2003

Paul Ryan, a Republican member of the House Ways and Means Committee is sponsoring a bill that would greatly benefit the mutual fund industry by allowing capital gains tax to be deferred until shares are sold.

At present, CGT rules in the United States discriminate against mutual fund investors, as they are liable to pay the tax on dividends that are reinvested in the fund by the fund manager. Individual share traders meanwhile, are only liable for capital gains tax when they eventually sell their investment for a profit.

Earlier this week, Ryan told CBS Marketwatch that the proposal would make mutual funds a much more attractive proposition, and level the playing field for fund investors.

"Current tax laws diminish their attractiveness and unfairly penalize their structure," he explained, continuing: "People who own mutual funds get these capital gains tax bills to their amazement, even though they don't sell the fund."

The Ryan proposals go further than similar legislation introduced by fellow Republican and Ways and Means Committee member, Jim Saxton, which sets limits of $3,000 and $6,000 for individuals and joint filers respectively in relation to the deferral of capital gains tax. However, Saxton is also a co-sponsor of the Ryan Bill.

Not surprisingly, the fund industry sees the capital gains tax issue as very burdensome, and is keen to see the new bill pass.

"Every fund company that has a tax-managed fund would absolutely love to see this bill go through. Capital-gains taxes are probably the most annoying and onerous thing about funds," Russel Kinnel, director of fund analysis at investment research firm Morningstar told CBS. "This would really be a boon to the fund industry."

The new bill is likely to have massive implications for the tax-managed fund industry, which attempts to minimize tax liability for investors by carefully balancing losses against gains. Such funds are now likely to become effectively useless if Ryan's bill passes onto the statute book, Kinnel suggested.

Recommended