How much tax do you pay when you sell mutual fund?

How much tax you pay when you sell mutual funds depends on how long you've owned shares in the mutual fund. If you've owned the share for less than a year, it will be taxed as ordinary income. If you've owned the share for more than a year, it's taxed as a long-term capital gain.

How do you avoid taxes when selling mutual funds?

To minimize your taxes when selling your mutual funds: Own the mutual fund for at least a year before selling. Offset any taxes on a capital gain by selling your shares when you have experienced capital losses in the same tax year. Invest in mutual funds through tax-advantaged accounts.

Are mutual funds taxed when cashed out?

You pay taxes on income from a mutual fund whether you cash out distributions or reinvest them in the mutual fund.

Are you double-taxed on mutual funds?

No. Unlike corporations, which pay tax on income they receive before paying out taxable dividends to shareholders, mutual funds pass through to shareholders any income they receive without paying tax on it.

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Mutual Funds and Taxes: How To Cut Your Bill

April 3, 2025

5 min Read

Written by Jen Pedrozo

Edited by Emily Gadd

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As a mutual fund owner, you may have to pay taxes on any income your shares generate. But how are mutual funds taxed when you sell? Being aware of your tax obligations when you own a mutual fund can help you save money at tax time.

When Do You Have To Pay Taxes on Mutual Funds?

As a mutual fund shareholder, you may see two types of payouts: ordinary income dividends and capital gains distributions.

You’ll have to pay taxes on ordinary income dividends for when you own the mutual fund. You’ll pay capital gains distributions when you sell the mutual fund.

Ordinary Income Dividends

Mutual funds own assets that generate income from dividends and interest. Mutual fund managers divide the profits among the mutual fund’s shareholders as ordinary income dividends. This income is taxed as ordinary income at your tax bracket rate.

Your annual ordinary dividend amount is listed in box 1a of the Form 1099-DIV that your mutual fund sends you in January.

Capital Gains Distributions

When mutual funds sell an investment at a profit, the profit is divided among shareholders and distributed as a capital gains distribution. All capital gains distributions from a mutual fund are taxed as long-term capital gains.

Your annual capital gains distribution is listed in box 1b of Form 1099-DIV.

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How To Cut Taxes on Mutual Funds

Minimize the tax burden on your mutual fund using the following strategies.

1. Hold Your Mutual Fund for at Least a Year

The tax rate on capital gains is lower if you’ve owned the mutual fund for more than a year.

2. Invest in Mutual Funds Through Tax-Advantaged Accounts

You won’t pay taxes on dividends, capital gains distributions and capital gains from the sale of a mutual fund in a 401(k) or a traditional IRA until you withdraw the money after age 59 ½.

Any earnings from a mutual fund in a Roth IRA will grow tax-free, and qualifying distributions will also be tax-free.

3. Sell Your Mutual Funds When You Have Capital Gains Losses To Offset Them

If you have a capital gains loss in a tax year, you can use that loss to offset any capital gain from selling your mutual fund shares in a practice called tax-loss harvesting. For example, if you sell a boat at a capital loss of $10,000 but sell your mutual fund shares for a gain of $11,000, you’d only have to pay taxes on $1,000 of your gain.

4. Invest in Mutual Funds With Fewer Dividends

Some mutual funds, particularly those that own growth stocks, rarely pay dividends. But if you invest in bond funds or those that own high-dividend stocks, you’ll likely receive frequent income distributions, perhaps as often as monthly.

5. Invest in Active Mutual Funds With Low Turnover

Each fund manager is different. Some trade frequently in an effort to capture gains for clients, while others stay with stocks for the long-term. Funds with high turnover not only generate larger taxable gains, they’re often of the short-term nature, which means you’ll have to pay a higher tax rate.

6. Buy Passive Index Funds

Most equity funds pay some type of capital gains distribution at the end of the year. But if you invest in an index fund, which is a passive mutual fund that doesn’t buy and sell securities as often as other types of mutual funds, you won’t usually receive large annual capital gains distributions.

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Final Take

You may have to pay income taxes on any dividends and long-term capital gains on any capital gains disbursements from a mutual fund. You’ll owe capital gains taxes on any profits from selling your shares. By planning ahead, however, you can minimize your final tax liability.

FAQ

Here are some answers to other commonly asked questions about mutual funds and taxes.

How much tax do you pay when you sell mutual fund?
- How much tax you pay when you sell mutual funds depends on how long you've owned shares in the mutual fund. If you've owned the share for less than a year, it will be taxed as ordinary income. If you've owned the share for more than a year, it's taxed as a long-term capital gain.
How do you avoid taxes when selling mutual funds?
- To minimize your taxes when selling your mutual funds:
  - Own the mutual fund for at least a year before selling.
  - Offset any taxes on a capital gain by selling your shares when you have experienced capital losses in the same tax year.
  - Invest in mutual funds through tax-advantaged accounts.
Are mutual funds taxed when cashed out?
- You pay taxes on income from a mutual fund whether you cash out distributions or reinvest them in the mutual fund.
Are you double-taxed on mutual funds?
- No. Unlike corporations, which pay tax on income they receive before paying out taxable dividends to shareholders, mutual funds pass through to shareholders any income they receive without paying tax on it.

John Csiszar contributed to the reporting of this article.

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