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What Is a Phantom Gain?

Mary McMahon
Updated May 16, 2024
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Phantom gain is an apparent earning that must be declared on taxes, even if someone actually took a loss. This can come up in some rare financial situations and may be a consideration for people preparing to engage in certain activities that might have capital gains implications, like selling a home or buying shares in a mutual fund. A tax attorney can provide advice on how to handle a phantom gain to minimize tax liability while remaining within the law.

In one example of how this can happen, a mutual fund might need to sell some shares to raise capital. This is most commonly the case when people want to sell their shares back to the fund, and the fund can’t afford to buy them without selling investments. This results in a capital gain for the fund, because it realizes profit on the sale, and so do the members of the fund. The value of the fund may subsequently drop because it’s not holding those profitable investments, creating a capital loss, but for tax purposes, members still need to declare the capital gain and accept their tax liability.

Another type of phantom gain can occur in connection with a home foreclosure. People losing their homes take a loss because they cannot take their equity with them, but they may also realize capital gains. If banks forgive part of the loan, this is considered a form of gain, and the borrower may be treated as the seller for tax purposes, and thus could end up with capital gains from the sale price. Borrowers may not be aware that a foreclosure could cause a phantom gain, and may not realize they need to declare it on taxes.

The tax code is designed to account for a variety of financial situations to make sure taxes are collected appropriately. Phantom gains are one of the areas where the principles behind the tax code are sound, but a strange twist of circumstances may cause the situation to seem unfair. Capital losses can also be reported, allowing people to reduce a phantom gain by declaring losses in a given tax year.

Tax planning can take place throughout the year, but it can be especially important in December, when people have one last chance to make moves that may reduce their tax liability in the coming year. An accountant can review financial statements and other information to provide advice on how a taxpayer might want to handle specific tax issues. If a phantom gain is likely to show up on a tax return, it can be helpful to plan for it ahead of time.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
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