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Mutual Funds (Costs, Distributions, etc.)

Question: I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares?

Answer:

A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management.

You own shares in the fund, but the fund owns capital assets such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for you is to sell these assets at a gain.

If the capital asset was held by the mutual fund for more than one year, the nature of the income is capital gain, which gets passed on to you. These are called capital gain distributions, which are distinguished on Form 1099-DIV (PDF) from other types of income such as ordinary dividends.

Capital gains dividends are taxed as long-term capital gains regardless of how long you have owned the shares in the mutual fund.

Report the amounts shown in Form 1099-DIV, box 2a, on Schedule D (Form 1040) (PDF), line 13.  Review the Instructions for Form 1040 and the Instructions for Form 1040A for additional information.

Additional Information:


Category: Capital Gains, Losses and Sale of Home
Subcategory: Mutual Funds (Costs, Distributions, etc.)

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue NW
Washington, DC 20224