When I first started investing in mutual funds, I didn’t give much thought to capital gains taxes. But over time, I realized how much they can impact my net returns—especially when dealing with mutual funds in a taxable brokerage account. One rate that often confuses people is the so-called 28% capital gains tax. It’s not the standard rate, and it doesn’t apply to every gain. But under specific circumstances, it absolutely matters.
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What Are Capital Gains in Mutual Funds?
When I own mutual funds, I earn returns in three ways:
- Dividends
- Interest income
- Capital gains
Capital gains occur when the fund manager sells a security inside the mutual fund for a higher price than what they paid. These realized gains are then passed on to me, the shareholder, usually at year-end.
Even if I don’t sell the fund, I can still owe taxes on those gains if I hold the fund in a taxable account.
Capital Gains Tax Rates: The Basics
There are two types of capital gains:
- Short-term capital gains: Held for one year or less
- Long-term capital gains: Held for more than one year
Here’s how they’re typically taxed:
| Type | Holding Period | Taxed As | Typical Rate |
|---|---|---|---|
| Short-term | 1 year or less | Ordinary income | 10%–37% |
| Long-term | More than 1 year | Capital gains | 0%, 15%, or 20% |
But that’s not the full picture. Some types of assets—including certain collectibles and specific fund distributions—can be taxed at a maximum rate of 28%.
So, Where Does the 28% Rate Come From?
The 28% capital gains tax rate applies to collectibles and mutual fund distributions from the sale of collectibles or similar special assets.
The IRS defines collectibles broadly. This includes:
- Artwork
- Antiques
- Stamps
- Coins
- Precious metals (like gold, silver, platinum bullion)
- Certain exchange-traded funds (ETFs) that invest in physical gold or silver
- Shares in mutual funds that invest in such items
So, if I invest in a mutual fund or ETF that holds collectibles—either directly or through a special structure—the IRS treats gains from those sales differently.
When Mutual Funds Trigger the 28% Rate
Not all mutual funds fall under this. The 28% rate generally kicks in only under three specific conditions:
- The mutual fund sells collectibles or collectibles-linked assets (e.g., precious metals ETFs held inside the fund).
- I sell a mutual fund that directly invests in collectibles.
- The fund distributes gains derived from these sales.
Let me give a direct example.
Example:
Suppose I own Fund A, a precious metals mutual fund that invests primarily in physical gold and silver. Over the year, the fund realizes $2,000 in gains from selling physical bullion.
The fund then distributes this $2,000 to me at year-end.
That gain does not qualify for the 0%, 15%, or 20% long-term capital gains rates. It’s taxed at up to 28%, even if I’ve held the mutual fund shares for many years.
So if I’m in the 32% income tax bracket, I still only pay 28% on that portion of my capital gains. If I’m in a lower bracket, I might pay less—but never more than 28%.
Breakdown of Tax Treatment by Fund Type
| Fund Type | Typical Asset | Max Capital Gains Tax Rate | Notes |
|---|---|---|---|
| S&P 500 Index Fund | Equities | 20% | Long-term gains, unless short-term |
| Bond Mutual Fund | Debt instruments | 37% | Gains taxed as ordinary income |
| Gold Mutual Fund | Physical bullion | 28% | Special rate on collectibles |
| Art/Collectibles Fund | Rare items | 28% | Applies at distribution or sale |
| REIT Mutual Fund | Real estate | 20% or 37% | Complex, part ordinary income |
Why This Matters in a Taxable Account
In my Roth IRA or 401(k), I don’t worry about this. But in my taxable brokerage account, every distribution from a mutual fund can create a tax event—even if I don’t sell.
That’s why I always:
- Read the fund’s prospectus
- Look at the portfolio turnover ratio
- Consider whether the fund invests in asset classes subject to special tax rules
Calculating Tax on a 28% Fund Distribution
Let’s say I receive a $2,000 long-term gain from a collectibles fund in my taxable account.
My tax bill is:
Tax = 0.28 \times 2000 = 560That’s $560 gone to taxes, even though I didn’t sell anything.
Now compare that with a regular equity mutual fund:
Tax = 0.15 \times 2000 = 300I save $260 in taxes just by avoiding collectibles-focused funds.
The Trap of Precious Metals Funds
Funds that hold physical gold—like those structured as grantor trusts (e.g., SPDR Gold Shares or iShares Silver Trust)—often don’t behave like normal funds.
The IRS treats those as direct ownership of the underlying metal. That means even if I sell them after many years, I still pay up to 28% in capital gains tax.
These funds are wildly popular in inflationary times, but many investors get blindsided at tax time.
What About ETFs?
Some ETFs avoid this issue by investing in gold mining stocks instead of physical bullion. For example:
- A precious metals equity ETF might hold shares in companies like Newmont or Barrick Gold.
- Those are regular stocks, so I pay 0%–20% long-term capital gains tax, depending on my bracket.
That’s a big reason I might choose those over bullion-based mutual funds.
My Strategy to Avoid the 28% Rate
To steer clear of this higher tax bracket on capital gains, I do the following:
- Avoid mutual funds or ETFs that hold physical collectibles unless I keep them in a tax-deferred account.
- Stick to index funds and equity mutual funds that don’t deal with alternative assets.
- Use tax-advantaged accounts (Roth IRA, Traditional IRA, 401(k)) for funds with unusual structures.
The Role of the IRS Schedule D
When I file taxes, I report capital gains from mutual funds on Schedule D. If a distribution qualifies for the 28% rate, I enter it on Line 18 of Schedule D, Part II, with a special note indicating it’s a “28% rate gain.”
The IRS watches this closely. So I make sure the 1099-DIV or 1099-B I get from my broker lists everything clearly.
What If I Reinvest the Distributions?
Some investors think reinvesting distributions avoids taxes. It doesn’t.
If I opt for automatic reinvestment of gains:
- I still pay tax on the distribution in the year it was made.
- My cost basis in the mutual fund increases.
Reinvestment helps with compounding, but it doesn’t defer the tax.
Final Thoughts
The 28% capital gains tax isn’t common—but when it applies, it can sting. Mutual fund investors need to be aware of what their funds actually hold. If the fund buys and sells collectibles or metals, I can get hit with a much higher tax bill than expected.
By paying attention to fund structure and holding the right assets in the right accounts, I keep more of what I earn.
