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Can't Win for Losing

A mutual fund tax quirk limits your capital losses.

By Scott Bernard Nelson

Opinions expressed by Entrepreneur contributors are their own.

When the stock market was going gangbusters and virtually everyfund was posting impressive returns, the tax man nicked investorseach year for capital gains (assuming the funds weren't heldinside tax-deferred retirement accounts). You might never have solda share or seen a penny of profit, but the funds "passedthrough" their capital gains to you at tax time. The fundmanagers bought and sold stocks during the year, even if youdidn't. Whatever capital gains the stocks generated weredivvied up among the shareholders at year's end, and you paidthe freight.

Now that virtually every fund is losing money, they should passthrough their capital losses so you can write them off on yourtaxes, right? Think again. This is the IRS we're talking about,so of course it isn't that simple. Thanks to a quirk in the taxcode, investment losses stay within the funds even if investmentgains don't. As a shareholder, you get nada for internallygenerated capital losses when it comes to tax time.

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