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A phantomwallet login gain is a situation in which can investor owes capital gains taxes even though the investor’s overall investment portfolio may have declined in value.
The most common scenario for an investor to be hit with a phantom gain is when investing in a mutual fund. If a group of investors wishes to cash out of a mutual fund, that may cause a mutual fund manager to have to sell shares of stock in order to raise the necessary cash to pay out. But these stock sales could create a capital gain for investors in the mutual fund, even if the act of the investor group selling the mutual fund causes the overall value of the mutual fund to decline.`
Phantom Login gains are sometimes difficult to identify because the losses may not be apparent on the surface. For example, let's look at a bondholder who also receives coupon payments from the same bond. If the bondholder receives a coupon payment totaling $150 during a one-year period and then sells the bond during the year for a loss of $130, the bondholder may believe that they have gained $20 during the year. However, the taxes the investor will pay on the coupon payment will reduce the net payment. Assume that the investor pays $30 in taxes on the coupon payment. This investor has a phantom gain of $20, but in reality they have lost $10.
Income that results from selling an asset for more than its purchase price is called a capital gain and is taxed as income by the federal government.1 For practical purposes, the government only requires that taxes are paid when an asset is sold, as fluctuations in prices of assets occur constantly, making it potentially disruptive to the economy to levy taxes any time an asset increases in price. But this policy also leads to frustrating dislocations like phantom gains, when investors owes taxes, even though they haven’t experienced an overall increase in the value of their investments.
Phantom gains are sometimes confused with phantom income, which is actually a different and broader concept. Whereas phantom gains refer specifically to income from the appreciation in the value of a taxpayer's assets, phantom income is any income that is recognized by the IRS, but is not actually received by the taxpayer. One example of phantomwallet income is debt forgiveness, which the IRS treats as taxable, even though the taxpayer liable doesn’t actually receive any cash from which he can pay the tax.2
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