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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 mutual fund held the capital asset for more than one year, the nature of the income is capital gain, and the mutual fund passes it on to you as a capital gain distribution. Form 1099-DIV (.pdf), Dividends and Distributions, distinguishes this from other types of income, such as ordinary dividends.

Consider capital gain distributions as long-term capital gains no matter how long you have owned shares in the mutual fund.

Report the amount shown in box 2a of Form 1099-DIV on line 13 of Schedule D (Form 1040) (.pdf), Capital Gains and Losses. If you have no requirement to use Schedule D (Form 1040), report this amount on line 13 of Form 1040 (.pdf), U.S. Individual Income Tax Return, and check the box, or on line 10 of Form 1040A (.pdf), U.S. Individual Income Tax Return. Review the Instructions for Form 1040 and the Instructions for Form 1040A for more 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