Sunday, March 31, 2013

Are Capital Gains on Tax-Exempt Mutual Funds Taxable?

Yes, capital gains on the sale of tax-exempt bonds and/or mutual funds are taxable.


Even though the interest paid on a municipal bond is tax-exempt, a holder can recognize gain or loss that is subject to federal income tax on the sale of such a bond, just as in the case of a taxable bond. The amount of gain or loss is equal to the difference between
  1. the sale price of the bond and
  2. the holder's tax basis in the bond (the amount the holder paid for the bond originally, including any additions to such basis, such as OID as discussed in the following section).

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