If you want to sell a mutual fund for a long-term gain, you may be better off selling before a year-end distribution. Suppose Ed Brown bought shares in XYZ Mutual Fund several years ago for $5,000. Now those shares are worth $15,000.
Ed thinks the fund might fall back so he sells after the year-end distribution.
Say that distribution is $3,000. Assume that half of this distribution is long-term capital gains, from stocks the fund held more than one year. Also assume the other half is short-term capital gains, from sales after a shorter holding period.
In this scenario, Ed will have $1,500 in short-term distributions (half of $3,000). That will be taxed as ordinary income, at rates up to 35 percent.
If Bob had sold before the distribution, the entire gain would have been long term, taxed at on 15 percent. Thus, if you are selling mutual fund shares at a long-term gain, sell before the distribution to get the low rate on the entire gain.
