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Investing in the financial markets really boils down to two basic factors – capital gains and capital losses. These gains and losses help determine your tax liability and, ultimately, impact your bottom line. Unfortunately, tax regulations can at times feel complicated and overwhelming.
That’s where J.P. Morgan comes in. Our goal is to help you understand the mechanics of these factors and how to make them work to your advantage, based on your investment needs.
There are two potential sources for capital gains distributions-mutual fund distributions and shareholder transactions.
Mutual fund distributions
Mutual funds generate capital gains and losses as they trade securities through out the year. Per IRS regulations, mutual funds must distribute their annual realized net capital gains to shareholders. The status of any capital gains distributed to shareholders (i.e. whether or not they are considered short-term or long-term) depends on how long the fund owned the securities that produced the gain – not how long the shareholder owned shares in the fund.
Shareholder transactions can have an impact on the mutual fund, causing it to have to buy and sell securities. These actions become more critical during market downturns. In particular, prolonged periods of market volatility can lead to increased shareholder redemption activity. To fund these redemptions, portfolio investment teams may need to sell securities. These sales sometimes generate capital gains (when a security sells at price higher than the original purchase price), which are distributed evenly to shareholders.
The second type of capital gain or loss occurs when an individual investor sells or exchanges shares of a fund and will depend on factors such as purchase price, holding period and sale/exchange price.
A few basics
It is important to regularly discuss capital gains/losses during annual portfolio reviews with your financial advisor. Positioning your portfolio appropriately is integral to mitigating losses and building on earnings. For additional information about capital gains distributions and tax planning, please refer to the tax planning section on this site.
J.P. Morgan Funds, JPMorgan Chase & Co. and its affiliates do not provide tax advice. The information is provided for general educational purposes only. The information is not to be relied upon for legal or tax advice. Investors should consult with their legal or tax advisors for personalized assistance, including information regarding any specific state law requirements.
J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc. which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds.
JPMorgan Chase & Co., November 2008