Fund distributions
A mutual fund can sell appreciated securities inside the fund and pass a capital-gain distribution to shareholders. The distribution can be taxable even when you simply kept owning the fund.
Tax Drag Reality Check · Costs & Taxes
Investment Tax Drag Calculator
“I didn’t sell anything. Why is my tax bill so big?”
Start with a two-input estimate, or use your tax forms to see how dividends, fund distributions and realized gains may be reducing what remains invested in a taxable account.
Reviewed · Aug 14, 2026
Don’t have your 1099 in front of you? Start here.
If you can estimate how much tax your taxable investment account generated last year, Terra can turn that number into a simple annual tax-drag percentage. This does not tell you whether the tax was avoidable.
Use an approximate average or current account value.
Use a CPA/tax-software estimate or your best approximation. If you do not know, switch to Detailed mode.
What Quick mode can tell you: the tax amount you entered as a percentage of the account and a compounding illustration if that drag repeated. It cannot identify which income category created the tax.
No prior-year tax bill or 1099 yet?
Use planning mode for money you are about to invest. The percentages below are hypothetical assumptions, not forecasts for any specific fund.
Amount you expect to hold in a taxable brokerage account.
Example only. Replace with your own assumption.
Simplified assumption; actual tax character varies.
Use this to test low or high taxable activity; it is not a prediction.
Simplified assumption. State rules differ.
Planning mode is intentionally approximate. It does not predict a specific fund's distributions, determine your tax bracket, model loss harvesting, basis, NIIT eligibility or state-specific rules. Its job is to show how different taxable-activity assumptions can change what remains invested.
Enter what your taxable account generated
If you have Form 1099-DIV, the box numbers below give you an easy starting point. Add realized gains from sales separately.
Used to translate estimated tax into annual tax drag as a % of the account.
Interest from taxable cash/bond holdings, if applicable.
Includes qualified dividends reported in Box 1b; do not add 1a + 1b together.
Subset of Box 1a. Terra applies your long-term/qualified rate assumption to this part.
Funds can report these even when you did not personally sell your fund shares.
Enter a nonnegative amount after gain/loss netting you have already determined. Terra does not perform loss netting.
Enter a nonnegative amount after gain/loss netting you have already determined.
Use your own estimated marginal rate. Terra does not determine your bracket.
Use the rate assumption appropriate for your situation.
Simplified input. State rules differ.
Enter an additional rate only if you have determined it applies to the modeled amount.
Important: this is an educational estimate, not a tax-return calculator. It does not model deductions, loss carryovers, special rate categories, basis adjustments, estimated-tax penalties, AMT, state-specific rules, or every interaction on a real return.
Optional long-term illustration
Scenario assumption only.
A user-set comparison assumption. Terra does not promise a particular fund, ETF or strategy will achieve it.
My Terra saves only when you press Save to My Terra.
Why the bill can appear
“I didn't sell anything. Why do I owe tax?”
A taxable investment account can create taxable income without a personal sell order.
Advisor/account trading
When securities are sold for gains inside a taxable account, those realized gains can create tax consequences even if the investor did not personally place the trade.
Dividends and interest
Investment income can be taxable even when it is automatically reinvested rather than paid out as spendable cash.
A crucial distinction
Tax cost is not the same as tax inefficiency.
A large tax bill deserves investigation, but it does not automatically mean an advisor or fund made a mistake.
Tax cost
Taxes that arise because a taxable account legitimately earned dividends, interest or realized gains. Some tax cost is simply part of owning profitable taxable investments.
Potential tax inefficiency
Tax friction that may be higher than necessary for the strategy — for example, frequent turnover, avoidable short-term gains, or tax-inefficient holdings in a taxable account. Context matters before calling it “avoidable.”
Tax efficiency
Lower turnover can matter in taxable accounts.
Passive does not mean “no trading,” and ETF does not mean “tax free.” The relevant question is how much taxable activity the investment creates for the shareholder.
Portfolio turnover
Turnover shows how frequently a fund buys and sells investments. Higher turnover can mean more transaction costs and may result in more taxes when the fund is held in a taxable account.
Active vs. passive
Actively managed funds often trade more than passive funds. That can create more opportunities for realized gains, although actual tax results vary by fund and year.
ETF structure
Many ETFs use in-kind exchanges that can reduce the need to realize and distribute capital gains. ETFs can still distribute gains and investors still owe tax when they sell appreciated ETF shares.
Account type first
Annual taxable-account tax drag is a different issue from taxes inside retirement accounts. Traditional and Roth retirement accounts have their own contribution and withdrawal tax rules.
Bring this to the conversation
Five tax questions to ask an advisor.
1. How much of my taxable-account bill came from capital-gain distributions inside the funds?
2. How much came from gains realized by trading securities in my account?
3. What are the turnover rates of the funds you use in my taxable account?
4. Do you report my after-tax results as well as my pre-tax results?
5. What tax-management practices are you using, and what tradeoffs do they create?
Next: compare the cost side in the Advisor True-Cost Calculator →
Tax-loss harvesting warning: selling at a loss and buying the same or a substantially identical security within the wash-sale window can prevent the current deduction of the loss. Tax strategies should be coordinated with a qualified tax professional when the stakes are material.
Official sources behind the tax explanations
Terra uses IRS and SEC investor-education sources for the core mechanics on this page. See: IRS — mutual-fund capital-gain distributions; IRS — Form 1099-DIV instructions; Investor.gov — portfolio turnover; and Investor.gov — mutual fund and ETF tax characteristics.
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