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 page.

Overview

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.

Shareholder transactions

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

• A fund's net asset value (NAV) per share decreases when portfolio securities decrease in value and/or when portfolio income and gains are distributed to shareholders;
  
  
• When a mutual fund distributes capital gains, the NAV (or share price) of the fund that day will reflect the capital gain amount distributed and reflect any market movement;
  
  
• If you choose to have your capital gains reinvested, you will still own proportionately the same amount of the fund that you did prior to the distribution, the only difference being the change in market movement.