Did you know that nearly 40 million Americans are hit with a surprise tax each year on gains they never received? $1,500 is the average amount millions of savers pay the IRS every year in phantom gains taxes. Why? Because buried deep in our outdated tax code is a policy that penalizes Americans holding mutual funds in brokerage accounts.
When mutual fund managers make trades within a fund, even if individual investors never sell a single share, investors are often hit with surprise capital gains taxes. That means they’re taxed on earnings they never took home. This inherently unfair quirk of the US tax code diverts hard-earned savings from being further reinvested or used in the real economy to the tune of $16 billion a year.
For most Americans, saving isn’t about hedge funds or stock options. It’s about modest investments, often in mutual funds, designed to build long-term wealth for retirement, college, or simply a cushion against financial uncertainty. Roughly 122 million Americans of all ages use mutual funds because they provide a low-cost way to invest in diversified portfolios. This annual tax headache punishes responsible behavior and undermines the parity our tax system should provide across diversified savings options. The GOP Congress has an opportunity to turn a multi-year compliance burden into a one time tax upon the actual sale of the underlying mutual fund. For working families, especially those living paycheck to paycheck, surprise taxes can upend carefully planned budgets and create unnecessary financial stress.
At a time when inflation is squeezing household budgets and Americans are being asked to do more to plan for their own retirement, this tax treatment sends exactly the wrong message. Washington should be encouraging long-term saving and reducing surprise costs for middle-income investors. Instead, it is quietly siphoning billions away from savings accounts through a technicality. That’s not just bad policy. It’s counterproductive. Americans deserve a tax system that is transparent, fair, and aligned with how real people invest today. Ending the phantom tax is a critical first step.
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Following President Trump’s signature tax bill, Congress has another opportunity to provide even more common-sense relief to Americans who are doing the right thing by saving and investing for a more secure future. At a recent Capital Markets Summit, Deputy Treasury Secretary Michael Faulkender agreed, “The way I've always understood capital gains is it should be deferred until realized and if I buy a mutual fund and I don't engage in a transaction why am I incurring a capital gains tax. Capital gains should be deferred until it is realized versus when the fund does a rebalancing. Other investment products do this and there needs to be some congruence there.”
Thankfully, there’s a fix underway: the Generating Retirement Ownership Through Long-Term Holding (GROWTH) Act, bipartisan legislation introduced in the House by Representatives Beth Van Duyne (R-TX) and Terri Sewell (D-AL) and in the Senate by Senator John Cornyn (R-TX). The bill would defer capital gains taxes on reinvested earnings in mutual funds until investors actually sell their shares. It would eliminate phantom gains taxes entirely, modernize the tax code, and send a clear message that Washington is on the side of responsible savers, not against them.
Fixing the phantom gains tax is a win-win. It supports middle-class families, simplifies the tax code, and gives Congress a powerful message on fairness and economic opportunity. It’s not hard to imagine what that message could sound like: We cut your gas prices. We made groceries more affordable. And we stopped the federal government from taxing you on money you never even received.
Lawmakers don’t have to look far for evidence that this fix is popular. Financial advisors, consumer advocates, and retirement experts across the spectrum have called for this change for years. Fixing the phantom tax isn’t about partisanship or ideology. It’s about respecting the decisions of people who are saving steadily, living within their means, and planning ahead. These Americans aren’t asking for a bailout. They’re asking for fairness. Congress has a chance to do something that is both technically sound and politically smart, especially heading into a pivotal election year.
It’s time for Congressional leaders to step up and get the GROWTH Act passed. They have an opportunity to show Americans that they are listening, they are governing, and they are delivering.
Ken Blackwell is the former Ohio Treasurer of State. He is on the Board of the Club for Growth.
Editor's Note: President Trump is leading America into the "Golden Age" through commonsense reforms.
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