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Avoiding ‘surprise’ tax on mutual fund holdings

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in Small Business Tax

Q. I have invested in several T. Rowe Price mutual funds. Will I have to pay tax on capital gain distributions if a fund has a loss for the year? G.J., Norristown, Pa.

A. Yes. The fact that your fund shows a paper loss is irrelevant unless you choose to sell some of the shares. In that case, you may use the resulting loss to offset capital gains from sales of mutual fund shares or other capital assets and to offset capital gain distributions. Any excess loss can also offset up to $3,000 of ordinary income.

If you sell the mutual fund shares before the “ex-dividend date” (the date when you become entitled to annual capital gain and dividend distributions), you can avoid tax on those distributions.

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