Proposed GROWTH Act Has Shifted Tax Rules
New legislation aims to defer taxes on reinvested fund gains, potentially impacting long-term after-tax returns for investors.
Updated on Sept. 29, 2026 in Investing
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Should Congress change the tax rules to defer capital gains taxes for mutual fund investors?
Senator John Cornyn and Representative Beth Van Duyne have introduced the GROWTH Act, which would permit investors to defer taxes on certain reinvested capital gains until they sell their fund shares. This policy change intends to improve tax neutrality between mutual funds and exchange-traded funds for the average household investor.
Why it matters
The proposal seeks to minimize the influence of federal tax rules on investment decisions by equalizing the tax treatment of mutual funds and ETFs. This change would provide investors with more flexibility regarding capital gains distributions, which currently create tax liabilities even while investors remain in their positions.
The act is projected to reduce federal revenue by $37.7 billion between 2027 and 2036, reaching an annual loss of $1 billion in later years. Projections indicate a 0.1 percent increase in average after-tax household incomes in 2027, eventually moderating to 0.05 percent by 2036.
The players
Senator John Cornyn
A U.S. Senator who serves as a lead sponsor of the legislation proposing changes to capital gains tax deferral rules.
Representative Beth Van Duyne
A U.S. Representative who co-sponsored the GROWTH Act to adjust tax policy for fund investors.
The details
Currently, mutual fund investors may face immediate capital gains tax liability on distributions, whereas ETF shareholders can avoid certain in-kind redemption gains. The GROWTH Act addresses this by allowing investors to defer tax on reinvested gains until the eventual sale of fund shares. The proposal also explicitly prevents taxpayers from avoiding taxes by utilizing a step-up in basis, ensuring that tax obligations remain settled when assets are liquidated.
Timeline
2027: The act is projected to increase average after-tax incomes by 0.1 percent.
2027-2036: The estimated federal revenue reduction window for the legislation.
2036: The act is projected to increase after-tax incomes by 0.05 percent.
Money Landscape
The GROWTH Act represents a shift in how federal policy governs investment taxation and long-term capital accumulation. It seeks to reduce the role of the tax code in investment decision-making, following a period of long-standing differences between how mutual funds and ETFs are treated.
If enacted, this legislation would allow you to defer taxes on qualifying reinvested capital gains until you choose to sell your shares, potentially increasing your net return on investment. Discuss how these potential deferral rules might affect your long-term savings strategy with a qualified tax professional.
The takeaway
The proposed GROWTH Act could change how you manage capital gains distributions by allowing for tax deferral on reinvested funds. Monitor Congressional activity regarding this bill to understand if and when these potential changes might affect your long-term investment planning.
Further reading
You can find more analysis on how tax rules affect your portfolio in our Investing section.
Source note: This article includes information reported by Tax Foundation.
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Should Congress change the tax rules to defer capital gains taxes for mutual fund investors?
