Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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True or False: Unrealized gains in a mutual fund are taxable.

  1. True

  2. False

  3. Only when cashed out

  4. Only for non-residents

The correct answer is: False

Unrealized gains in a mutual fund are not taxable because taxes are generally assessed only on realized gains. A realized gain occurs when an investor sells an asset for more than its purchase price, at which point the profit is realized and subject to capital gains tax. In contrast, unrealized gains represent potential profits on investments that have increased in value but have not yet been sold. Since the gains are not actualized through a sale, they do not trigger a tax obligation. The tax treatment of mutual funds entails that investors are only responsible for paying taxes on distributions and realized gains, rather than on the fluctuating value of their investments, which can change from one moment to the next. This understanding is crucial for investors as it significantly affects tax planning and investment strategies.