Mutual Fund Tax Overhang

49 Pages Posted: 1 Jul 2019

See all articles by Ethan Yale

Ethan Yale

University of Virginia School of Law

Date Written: July 1, 2019

Abstract

The built-in gain in a mutual fund’s portfolio is referred to as “tax overhang.” Tax is imposed on investors who buy shares in mutual funds with tax overhang even though the gain accrued before their investment. The consequence is accelerated tax, increasing the shareholders’ effective tax rate. This article (1) explains why this occurs and why it is a problem, (2) describes the magnitude of the problem, (3) describes and illustrates avoidance strategies funds use to avoid the bad effects of tax overhang, (4) argues that reform is warranted, and (5) describes and evaluates the options for reform.

Keywords: tax, tax policy, mutual funds, mutual fund taxation

Suggested Citation

Yale, Ethan, Mutual Fund Tax Overhang (July 1, 2019). Virginia Public Law and Legal Theory Research Paper No. 2019-38; Virginia Law and Economics Research Paper No. 2019-13. Available at SSRN: https://ssrn.com/abstract=3413063

Ethan Yale (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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