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Cooley Suggests Fix for Taxable Mutual Fund Investor Tax Issues

In a new column, Scott Cooley, Director of Policy Research for Morningstar, highlights the disparate tax treatment between mutual funds and hedge funds and is advocating that political leaders “provide tax fairness to mutual fund investors.” Cooley focuses on the requirement for mutual funds to distribute realized gains and the corresponding tax implications for investors holding mutual fund shares in a taxable account. He argues that while wealthier investors can build their own diverse portfolios and thus control the timing of capital distributions, for most lower and middle-income investors, mutual funds may represent the only opportunity for diversification.

Cooley notes that hedge fund and private equity fund managers are able to defer taxes on carried interest, and argues that they pay capital gains rates one what should be considered ordinary income. By closing this “loophole,” the government could use the proceeds “to pay for removal of the punitive taxes borne by fund investors.” Cooley has launched a petition to gain support for the idea.