In 2021, many managed investments distributed capital gains in November and December. Many investors received a nasty surprise when they got their 1099s and saw all the capital gains yet had not sold the investments.

To make matters worse, after paying capital gains, now many of those investments are down in 2022. Let’s go over three quick points.

First, while you may have to pay taxes on those gains, if the gains were reinvested, they raise your cost basis. This means that when you eventually sell the investment you won’t have to pay taxes again on that distribution.

Those investors in higher tax brackets especially want to watch taxable nonqualified distributions and short-term capital gains as these are taxed at your marginal tax bracket plus the 3.8% Medicare surtax on investment income (if you are subject to it based on income).

Second, with the markets currently down, you may want to check if you have any unrealized losses in either stock or bond-managed investments. If you do, one strategy is to sell those holdings to realize the tax losses and buy them back after 30 days. (If you buy back before 30 days the IRS won’t let you claim the losses.) You can then use the losses to offset gains during this year or carry them forward indefinitely to offset future gains.

Third, if you want to avoid these sorts of nasty tax surprises in the future, you may want to consider more tax-efficient investments.  Not all managed investments are created alike. Please see your financial and tax advisors to go over your personal situation. Ask them about the tax efficiency of your investments and whether assets are properly located in taxable versus tax-sheltered accounts.

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