As the end of 2013 is imminent, many people are starting to think about their income tax situation for the coming tax season. Inevitably, that makes some people look at the unfairness in the tax system. At this time of year, one area in particular draws the ire of proponents of tax fairness.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, talks about the taxation of mutual-fund distributions and why it's unfair for millions of fund investors. As Dan notes, with stocks, you don't have to pay tax on capital gains until you actually sell shares. But funds are required to distribute their capital gains on the stocks they sell inside their portfolio, creating taxable income for their shareholders even if they reinvest those distributions to buy new shares. Dan discusses how many investors have moved away from mutual funds toward broad-based ETFs Vanguard Total Stock (NYSEMKT:VTI) and SPDR S&P 500 (NYSEMKT:SPY) as well as SPDR Select Financials (NYSEMKT:XLF) and other sector-specific ETFs in order to minimize this problem. Unfortunately, lawmakers haven't made fixing this unfair tax a priority, meaning that investors will still have to deal with it for the foreseeable future.
Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.