Selling Mutual Funds

When an investor decides it is time to throw in the towel, then the investor is ready to sell their mutual funds. The investor must identify what shares they want to sell. The request must be made in writing in order to minimize the huge hit in capital gain taxes. Capital gain taxes are deferred until the investor begins to withdraw the money from the mutual fund. One mutual fund that does offers tax free growth on the investment is the Roth IRA. Fees are charged when the investor reaches the age of 59 1/2. Capital gain taxes must also be paid if you reinvested the money back into a different fund.

If the investor withdraws from the mutual fund, this is also considered selling shares of the mutual fund. Withdraws from the mutual fund are recorded the same way if the shares were sold directly and then capital gain taxes are calculated. The investor potentially sets up the risk of paying capital gain taxes twice-once on withdraws and then on selling of the mutual funds.

To calculate the amount of capital gain taxes, investors can use as what accountants call the first-in, first-out(FIFO) method or the average method.

Between the two methods, investors lean towards the simple answer-the average method.

The easiest way to calculate not being double slammed on the capital gain tax is the average method. There are two types of average method calculations: single-category and double category.

For the single-category method, this method computes all the shares together. The goal is to fall under the short-term capital gain tax rules.

For the double-category method, this involves separating the shares and calculating between the long-term and the short-term capital gain taxes. The investor must identify which shares were sold during this time.

For FIFO, the Internal Revenue Service(IRS) stipulates that investors must use the first shares that were sold to calculate capital gains. This is the price of the original purchase of the oldest shares. First thing is to identify he specific shares that were sold. The request must be made in writing in order to minimize the huge hit in capital gain taxes.