With capital gains taxes this year expected to reach levels unseen since the tech boom, ironically, there are a number of mutual funds that are poised to post big profits but tiny tax bills to their investors.
In the up and down cycle of the capital markets, oftentimes there arrives a year, like 2005, where funds post tidy profits, but because they are unable to write off losses of previous years, their investors get socked with huge tax bills. But for funds that did exceptionally bad during the last bear market, they still have plenty of what's called, loss carry-forward to minimize capital gains tax distributions to their investors.
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Funds can carry forward losses for eight years and the amount they intend to carry forward each year is listed on some fund Web sites, or within their prospectuses.
But some experts are careful about investing in funds with lots of loss carry-forward. Ken Gregory, a financial adviser based in Orinda, Calif., said, "It doesn't make sense to invest in a fund solely because it has loss carry-forwards," although he concedes that that is one "silver lining." Another expert warned that losses could be eaten through very quickly, so the smartest choice would be funds that explicitly seek to minimize taxes.
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