Mutual Funds owners face a capital gains bite

The Boston Globe reports:

Many people who own mutual funds will get an unpleasant surprise soon: They will get hit with big capital gains taxes even though the stock market has been flat.


When the stock market crashed early this decade, a silver lining was that many funds were able to use their losses as a shield against future taxes. The Dow Jones industrial average, the most widely quoted barometer of stock market performance, fell for three straight years at the beginning of the decade, dropping 27 percent from the end of 1999 to 2002, and has yet to regain all those losses.

But now these shields, or ''carryforwards," are running out, a problem even for funds that aren't performing well overall. Some funds have already put investors on notice they can expect a bite at tax time.

For instance, someone who owns 1,000 shares of Fidelity Investments' Value Strategies fund will have to report $7,550 in capital gains income on the April tax return, up from the $150 reported in 2004. That's even though the fund has lost 2.4 percent of its value so far in this year's tepid market.

Now you understand why big government people want a capital gains tax.