Capital Gains

00:00:05

Welcome everyone to another edition of Cornerstone Clips. I am here to talk to you about capital gain distributions and sometimes this can be a confusing 1, so I’ll hope to provide some clarity on this throughout this short clip. So, capital gains are something when you sell an investment, you incur a gain. If it’s appreciated in value.

00:00:30

There are two types of capital gains. There are short term capital gains that you pay at income tax levels. If you held the investment for 12 months or shorter. If it’s longer than that, it’s taxed at a long-term capital gain rate, which is typically 15%. So, it’s a preferred tax rate.

00:00:49

So today we’re going to talk about distributions of capital gains, and this refers to the utilizing investment vehicles like mutual funds and actively managed ETFs, but I’ll just refer to mutual funds knowing that it also applies to ETF’s as well. So, when.

00:01:08

You own a mutual fund. The reason why you own that fund is it’s being managed throughout the year and there’s been there’s, buys and sells that take place well. A mutual fund in and of itself does not pay.

00:01:20

Taxes. So, throughout the years it’s incurring these taxes whether they be losses or gains managers take that into consideration and try to reduce the taxability of their investment strategy. However, there’s going to be years where they realized gains for the year and since the mutual fund itself does not pay taxes. They distribute that gain to its shareholders, and this typically happens. Mid November to to late December is kind of the time frame that this takes place and what happens when they distribute the the capital gain is it’s a multi-day process the the the record date in which you.

00:02:08

Own the mutual the fund means that that’s when the if you own it on the record date, that means you’re going to be subject to the capital gain distribution. And what happens when that process starts is, let’s say the mutual fund is going to pay a 3% capital gain distribution that year. There’s going to be a day in which you look at that investment and that investments value is going to decrease by 3%.

00:02:38

So, if the markets flat on that day and you look at this particular investment, you’re going to be like, why was that investment down 3%? Most likely if it’s in between November and December time period, that’s due to the capital gain distribution being paid out. But after that day.

00:02:58

It could be a day or two. What happens is there’s this payable date in which the mutual fund then gives you back 3% worth of shares to make your account whole, or your investment position whole. And this process does look funny, and we get many questions at the end of every year about it and that is why we wanted to put this.

00:03:23

Short clip together to help clarify what takes place and what that process is. So, it does take a day or two for you to feel like that position was made whole and it can cause some confusion, but hopefully this short explanation. Help clarify any confusion that it does, but make sure and always know that cornerstone. We’re here to help and answer questions that pertain to you and your individual positions and accounts. And feel free to reach out if something comes up. Thank you so much.