Mutual funds are sometimes broken down into two camps: loaded funds and no-load funds. Loaded funds include a sales charge, commission or fee, usually when you buy your shares but sometimes when you sell. No-load funds don't have a sales charge, although they might have other fees, such as a purchase fee or a redemption fee. Regardless of what you call them, you can't deduct them on your taxes.
While you can't deduct the sales commission for acquiring mutual fund shares, you can still get some tax benefits from them. Sales charges become a part of your mutual fund shares' cost basis. For example, if you bought 100 shares of XYZ mutual fund at $10 per share, the total price would be $1,000. If the fund included an 8.5 percent sales commission, you'd have to pay an additional $85, making your total investment $1,085 and giving you a cost basis of $10.85 per share.
Selling Your Shares
Mutual fund shares don't sell on the open market like shares of stock. When you get ready to sell them, you have to sell them back to the mutual fund company, and that company must stand ready to redeem your shares during regular hours of every business day. If a sales commission is charged for redeeming your shares, you can't deduct that expense on your taxes, but you can reduce the amount you receive by that amount. For example, if you redeemed 100 shares of XYZ mutual fund at $15 per share, you would receive $1,500. If the mutual fund company had a 3 percent redemption fee, your proceeds would be reduced by $45, so your total receipts would be $1,455 or $14.55 per share.
Your cost basis and total receipts are important because they reduce the amount of your investment income that is subject to capital gains taxes. The taxable capital gain from the examples above would be $370 ($1,455 minus $1,085). If you had figured your capital gain only using the original prices per share, you would have been taxed on $500 ($1,500 minus $1,000).
You can't deduct sales commissions for buying or selling investments such as stocks, bonds or mutual funds, but some types of investment expenses are deductible as miscellaneous expenses. You can include fees charged by your financial adviser for advice and counsel, along with a portion of your safe deposit box rent if you use the box to hold investment related documents. If you bought your mutual fund for your individual retirement account, you might be able to deduct your IRA custodial fees. You can even deduct to the cost to subscribe to investment publications. But if you want to claim any of these miscellaneous expenses as a tax deduction, you'll have to itemize on Schedule A.
- Christian Science Monitor: Mutual Fund Sales Commissions -- Are They Tax-deductible?
- Internal Revenue Service: Publication 550, Expenses of Producing Income
- Schwab: Investment Expenses -- What's Tax Deductible?
- Securities and Exchange Commission: Mutual Funds
- Securities and Exchange Commission: An Introduction to Mutual Funds
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.