Do you have to pay taxes on index funds?
July 22nd, 2010
I just opened an account and bought shares of VFINX. At the end of the year if I don’t sell any shares, do I still have to pay taxes? And what if I do sell shares, what do I do about taxes then?
My Related Websites
- Investment Portfolio: 2007 Year-End Holdings And Performance …
- June 2007 Investment Portfolio Snapshot: Paralysis By Analysis …
- Specific Mutual Fund Investment Ideas For Beginners » My Money Blog
- Lazy Portfolios Thru June 2010
- S&P 500 Index Fund Comparison – Hint: Not All Index Funds Are Great!
Mail this post
Posted in 
Tags: 
When you get smarter start trading ETF’s.
They are like mutual funds but the commission is about 400% less.
SPY would be it for what you bought.
/
If your fund earns dividends you will likely owe federal income tax on the dividends paid, even if those dividends were reinvested into the fund. If you do not sell shares of the fund, there is no capital gains tax regardless of how much the fund makes or loses over the course of the year. If you do sell shares, then you would subtract your basis in the shares (purchase price plus commission and other appropriate expenses) from the sales price and report either a capital gain or loss on Schedule D of Form 1040.
If you don’t sell, you don’t pay taxes unless the fund pays dividends and/or has a capital gains distribution – those are taxable in the year given, whether you take the money out or reinvest it in more shares.
If you sell shares, any gain over your basis in those shares is taxed. You’d fill out schedule D on your tax return.
You will owe tax on any interest or dividend income that the fund distributes to you. There is no capital gain consideration until you redeem the shares. And it make no tax difference if its an index fund or an "actively managed" fund. The fund company will send you the appropriate Forms 1099 after the end of the year.