A couple came to me with a portfolio they had accumulated over many years, long before we began working together. They asked about their previous year’s large tax bill. “We haven’t sold anything nor withdrawn money from the account,” they said. “So why do we owe capital gains tax?”
When I reviewed the paperwork with them and their accountant, the explanation became clear: mutual funds they had owned for nearly two decades had generated substantial taxable distributions.
This came as a surprise because many investors assume that if they do not sell an investment, they will not owe capital gains tax.
How mutual funds create taxable events you never expected
Inside the fund, managers buy and sell securities throughout the year. When those trades produce gains, the fund is required to distribute the profits to shareholders. Even if you reinvest every dollar and never touch the money, you may owe tax on the gains as though you received cash.
This couple had held the same aggressive growth funds for years. In prior years, losses elsewhere in their portfolio or smaller distributions meant the tax impact went unnoticed. This particular year, with no offsetting losses and a highly active trading period inside the funds, the liability was impossible to miss.
When holding and selling both feel like losing
Because they had owned these funds for so long, the embedded gain had grown to several hundred thousand dollars. Selling the funds to avoid future distributions would trigger a massive one-time capital gains tax. Holding them meant accepting ongoing distributions and the bills that come with them. Neither option felt good, but both were real consequences of decisions made years earlier.
For Americans living in Israel, capital gains are generally taxed first by Israel first, with any remaining U.S. liability potentially applied afterward. The combination of annual distributions and embedded gains meant this couple faced ongoing tax exposure whether they sold or stayed put. (This article is for educational purposes only. Check with your accountant about your situation.)
If you hold mutual funds purchased years ago, a review may be overdue. To discuss your portfolio structure and tax exposure, schedule a free introductory call or contact our office at 02-624-2788.
Douglas Goldstein, CFP® is the director of Profile Investment Services, Ltd. profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for help with your U.S. brokerage and IRA accounts. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The author’s opinions are not necessarily those of PRG or its affiliates. Neither PRG nor its affiliates provide tax or legal advice.
Published July 28, 2026.