Is Tax Relief Coming ... for Fund Investors?

Amid all the tax-cut wrangling surrounding next year's budget, House Republicans are floating yet another tax break of sorts -- this time, for mutual fund investors.

A bill introduced in the House Ways and Means Committee (from which all tax law must start) proposes to allow fund investors to defer paying tax on the long-term capital gains generated by the fund management.

Currently, investors owe tax on all capital gains generated by the portfolio manager's buying and selling. And -- as all too many of you know -- that frequently means that fund investors are socked with a big tax bill even if they haven't sold any shares and (most painfully) even if the value of their investment has actually gone down.

"This bill puts fund investors on the same footing as stock investors," says Chris Wloszczyna, a spokesperson for the Investment Company Institute, the lobbying arm of the mutual fund industry. ICI has already come out to support the bill, which was just introduced last week by Wisconsin Republican Paul Ryan.

Under the terms of this bill (H.R. 1989), the long-term gains (those generated when the portfolio manager sells a stock he or she has held more than 12 months) won't be taxable until the fund investor sells his or her shares. The bill only defers taxes on capital gains; it does not eliminate them. Currently, that tax is due in the year the gains are generated.

The distribution of short-term gains still will be taxable as ordinary income in the year they're distributed.

While in the late 1990s many mutual funds engaged in a frenzy of trading that generated big short-term gains, the bulk of most mutual fund distributions are actually long-term gains, according to fund research firm Lipper, a Reuters company.