Phantom Gain

You have to pay taxes on capital gains. Meaning that, if you make money in the stock market, you owe some part of that to the government. It may seem simple to figure out what constitutes a gain and what doesn't. But the process can become complicated...especially if you're operating in a more complex financial situation. A phantom gain is one of these situations.

You've heard of tax loopholes? Typically, they mean you have found some clever way to keep from paying taxes. A phantom gain is a tax loophole in the government's favor. You end up paying taxes on gains that you don't actually receive.

When giving examples of a phantom gain, mutual funds come up a lot. When you cash out of a fund, the fund has to raise money to send you your check. It does this by selling some of its holdings. If those stocks are sold at a gain, taxes are owed on the proceeds.

Meanwhile, the fact that you are cashing out of the fund can cause the value of the fund to dip. So stocks are being sold at a profit (with all the tax implications that comes with it) while the fund itself loses ground. Phantom gains.