Phantom gains

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.