Why do I have a tax bill for my investment even when the value has dropped?
During times of volatility, it’s natural for investors to worry that their investments will lose value – in fact they may even expect a decline at times. What’s unexpected, however, is getting a tax bill for an investment that has dropped in value. Many mutual fund and segregated fund investors may wonder why this happens.
The reason is fairly straightforward. The fund has either received income (interest or dividends) from its underlying investments during the year, or the portfolio manager sold underlying investments, realizing a capital gain. Even though the price of the fund has dropped, the income from transactions that have occurred throughout the year must be passed along to investors, and that income is taxable.
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