An investor wants to make a $1,000 distribution from their mutual fund portfolio.

If the investor’s only goal is to minimize taxes from a sale, they generally want to realize the smallest taxable capital gain (or potentially realize a loss). Cost basis is central: capital gain = sale proceeds − cost basis. A higher cost basis means less gain (or a greater chance of a loss) for the same sale amount, leading to lower taxable impact. Therefore, redeeming $1,000 from Fund A (high cost basis) is the best strategy, making A correct.

Redeeming $1,000 of Fund B (low cost basis) would typically produce a larger capital gain because the investor paid less (basis is lower) relative to current value. That larger gain increases taxable income (assuming the shares are held in a taxable account and not offset by losses). Splitting the redemption between A and B (choice C) would likely create more gain than redeeming solely from the higher-basis fund, so it is not optimal for tax minimization if a single-fund redemption is possible.

Choice D is imprecise and potentially misleading. “Higher profit” informally means larger unrealized gain, which would generally produce more taxable gain, not less. The tax-minimizing approach focuses on tax lot selection and selling shares with the highest basis (or lowest gain) when the objective is to minimize taxes, subject to the investor’s holding period (long-term vs short-term rates) and specific cost basis method used.

This is a core SIE taxable-account concept: when choosing which holdings to sell, investors can manage taxes by selecting higher-basis positions (or specific lots) to reduce realized gains.