2024 Capital Gains Snapshot: Understanding the Tax Pain Many Investors Will Feel

Executive summary:

  • Taxes on capital gain distributions are an annual reality for most investors.
  • Distributions aren’t tied to market performance but to trading activity.
  • Our review of estimated capital gains distributions shows that every asset class – even municipal bonds – will likely pay capital gains this year that will be subject to taxes.
  • Investing with tax management in mind is key to building after-tax wealth

Every year, most investors face a near-certain reality: taxes on their investment portfolio. Those who invested in individual stocks will likely be taxed on the capital gains (as well as investment income) that were realized over the year. Those who invested in either mutual funds or exchange-traded funds (ETFs) will receive a tax bill on the distributions received, which often include capital gains.

And that is the reality of capital gains: they happen. In fact, they happen no matter what the markets do. First, let’s look at what the markets DID do: as of the first week of December, the S&P 500 Index is up for the year by almost 30%; the small-cap focused Russell 2000 Index is up more than 20%. International Developed and Emerging Markets indices are in positive territory for the year. That makes it likely that no matter how your clients are invested, capital gains will be a reality.

A History of Capital Gains

As you can see below in Chart 1, capital gains are distributed annually. In the “good years”, including this year, capital gains are to a degree expected by investors. They may not like it, but it makes sense to them that if their portfolio goes up Uncle Sam will want to take his share. The thing is, when markets are down, capital gain distributions still happen. That’s because capital gains aren’t necessarily tied to the market’s performance, but to activity within the portfolio. In 2008, 2018, and 2022, capital gain distributions were still hefty even though investors may have fallen behind on their investment growth.

Chart 1:

chart 1