How are investors taxed on stocks and mutual fund investments? Check all that apply.

yes

Explanation:

Generally, yes, taxes must be paid on mutual fund earnings, also referred to as gains. Whenever you profit from the sale or exchange of mutual fund shares in a taxable investment account, you may be subject to capital gains tax on the transaction. You also may owe taxes if your mutual fund pays dividends. The amount of tax owed ultimately depends on the combined total of your gains and losses.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

"Realizing a capital gain from one mutual fund doesn't guarantee that you'll owe taxes on that gain. Each dollar of capital loss potentially can offset a dollar of capital gain."

— Mitchell Drossman, head of National Wealth Strategies in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank

A closer look at the capital gains tax

Short-term capital gains are gains from the sale of capital assets held for 12 months or less and are taxed at ordinary income tax rates. Long-term capital gains are gains from the sale of capital assets held for more than 12 months and are currently subject to a federal long-term capital gains tax rate of up to 20%.

2021 Capital Gains Tax RatesFootnote 1

Short-term

Held for 12 months or less

Ordinary income tax rate

Long-term

Held for more than 12 months

0%, 15% or 20% depending on your taxable income

But a capital gain in one mutual fund doesn't guarantee that you'll owe taxes on that gain. Each dollar of capital loss potentially can offset a dollar of capital gain.

For example if, in the same tax year, you have $1,000 in long-term capital gains and $600 in long-term capital losses, you'll pay tax only on the net long-term capital gain of $400. If your capital losses exceed your capital gains for the tax year, you can use up to $3,000 of these excess capital losses to offset ordinary income in such tax year. You can carry over capital losses in excess of $3,000 to offset capital gains in future tax years (and, potentially, ordinary income of up to $3,000 per year).

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