Phantom gains

Phantom Gain

A capital gain on which one owes taxes even if one takes a capital loss in the aggregate. The most common type of phantom gain occurs when a mutual fund sells some of its securities at a gain but its own shares decline in value. Because the fund's shareholders technically owned the securities that were sold for a gain, they must pay taxes on those gains even though they have actually lost money on their investment. A phantom gain should not be confused with a paper gain. See also: Phantom Income.

Phantom gains.

Phantom gains are capital gains on which you owe tax even if your actual return on the investment is negative.

For instance, if a mutual fund sells stock that has increased in price, you, as a fund shareholder, are liable for taxes on the portion of the gain the fund distributes to you.

The rule applies even if you bought shares of the fund after the stock price increased, and didn't benefit from the stock's rising value. You also owe the tax if you purchase shares in the fund after the stock has been sold but before the fund has made its distribution.

Phantom gains can also occur in a falling market, when a mutual fund may sell investments to raise cash to repurchase shares from shareholders who are leaving the fund.

If you're still an owner of the fund at the time any gains from those sales are distributed, you'll owe tax even though the value of your investment has decreased.

References in periodicals archive ?
Phantom gains tax has proved to be a major obstacle to lender takeovers of property.
This left no suitable means of protecting against phantom gains tax liability and led to our request for a ruling to validate a new approach for limiting the tax to the true economic gain realized in a transfer of property to a lender (usually, zero).
Rational investors should pay no heed to the phantom gains, and should evaluate our Company only on its true scientific and business merits.
2000-19, the Company will be required to report an additional phantom gain of approximately $111 million in its second-quarter financial statements.