Editing Index fund (section)

=== U.S. capital gains tax considerations ===
U.S. mutual funds are required by law to distribute realized capital gains to their shareholders. If a mutual fund sells a security for a gain, the capital gain is taxable for that year; similarly a realized capital loss can offset any other realized capital gains.

Scenario: An investor entered a mutual fund during the middle of the year and experienced an overall loss for the next six months. The mutual fund itself sold securities for a gain for the year, therefore must declare a capital gains distribution. The [[Internal Revenue Service|IRS]] would require the investor to pay tax on the capital gains distribution, regardless of the overall loss.

A small investor selling an ETF to another investor does not cause a redemption on ETF itself; therefore, ETFs are more immune to the effect of forced redemption causing realized capital gains.