Why do funds have to pay out taxable gains?
Mutual funds pay out taxable gains in order to qualify as a regulated investment company (RIC) under the Internal Revenue Code. Qualifying as a RIC makes the fund eligible to pass through any income and gains to shareholders without having to pay taxes at the fund level. This avoids a double taxation on the same income at both the fund and shareholder level. To qualify as a regulated investment company, the fund must pay out at least 90% of its income and short-term gains realized during its tax year. Additionally, the fund must pay out 98% of its calendar year income and 98% if its capital gains realized through October 31 of each year in order to avoid federal excise taxes.
