Letter to the Hill: The “Phantom Tax” Is Real, And It's Hurting Millions of Middle-Class Savers
By Chuck Flint, AIA CEO
The Alliance for IRS Accountability wrote to the Hill this week in support of the GROWTH Act of 2025, bipartisan legislation that would end an unfair “phantom tax” on everyday mutual fund investors.
If you invest in mutual funds outside of a retirement account, there's a good chance you've been paying taxes on money you never actually received. It's called a “phantom tax,” and it's one of the most overlooked and unfair features of the current U.S. tax code. The Alliance for IRS Accountability (AIA) is calling on Congress to fix it.
Under current law, when a mutual fund distributes capital gains — even when those gains are automatically reinvested back into your account — you owe taxes on them that same year. You never see the money. It never hits your bank account. But the IRS still sends you a bill. For the approximately 23 million households that hold mutual fund assets outside of retirement accounts, this creates unexpected tax burdens that chip away at the power of long-term, compounding investments.
Here's what makes this especially frustrating: investors in individual stocks and exchange-traded funds (ETFs) don't face this same treatment. When their gains are reinvested, they aren't taxed until they actually sell. Mutual fund investors — the vast majority of whom are working- and middle-class families, not Wall Street traders — are taxed under a different, harsher set of rules. That's not fairness. That's a structural distortion in the tax code that punishes everyday savers for choosing one of the most common wealth-building tools available to them.
The Generating Retirement Ownership through Long-Term Holding (GROWTH) Act of 2025 (H.R. 2089 / S. 1839), introduced by Representative Beth Van Duyne, Representative Terri Sewell, and Senator John Cornyn, would correct this imbalance once and for all. The bill is straightforward: defer capital gains taxes on automatically reinvested mutual fund distributions until the investor actually sells their shares. No more paying taxes on money you haven't received. No more penalty for staying invested for the long term.
The GROWTH Act aligns directly with AIA's mission to create a tax system that is fair, transparent, and accountable to ordinary Americans. It would end an unjust tax burden by making the tax code match economic reality, deferring liability until the point of sale, when investors have actually realized their gains. And it would simplify compliance by eliminating complex annual reporting requirements that create the kind of minor mathematical errors the IRS routinely uses to open aggressive audits against well-meaning taxpayers.
We urge Congress to pass the GROWTH Act of 2025 without delay. And we urge every American who has ever been hit by a phantom tax bill to make their voice heard. The tax code should work for you, not against you.
Read the full letter here.