mutual fund sale and reporting

snipped-for-privacy@yahoo.com (gsk) posted:

You're on the right track. You should add all of the reinvested dividends and capital gain distributions to your cost basis. For everything that was reinvested 1 year or more before you sold the fund, all of your gains are long term. For the limited amonts reinvested during the last year before selling, you will have to compute a separate item -- either gain or loss -- and enter it as a short term capital gain(loss). If you have good records (as it seems you do), it's really just a math problem to add up everything you reinvested plus your original cost to compute the full basis vs your net realization at the time of sale. Bill

That's the one.

Make two totals. One for purchases and reinvested dividends more than one year prior to date of sale (long term) and one for purchases within one year of sale. Allocate the sales price in the same manner. Report the results on Line 1 and 8 of your Schedule D.

Basically, yes.

That's the only wrinkle, you need to separate the long term and short term. Find your statements from the year before you sold, and any distributions during that time would count as short-term, while the original purchase and all other distributions would be long-term. Pro-rate the total proceeds of the sale to the two terms based on the number of shares. You can enter each of these as a single item on Schedule D

-- enter "various" for the purchase dates.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

You are correct. Add all the reinvestments to basis. Everything would be long term except the dividends reinvested within a year of the sale, and those shares will be a short term sale. Do not add them to the basis of the original shares or year old dividends. ed

I don't know about the OP, but I have to pay taxes on the cap gains and dividends for the tax year in which they are distributed. What can you do about those taxes? Are they to be added to the basis? Somehow it seems that double taxation creeps in. Let's say: Cap gains/dividends reinvested in 2003 were $1000 Taxes paid on that: $150 This portion of stock sold in 2005 for $1500 Straight cap gains on this is $500, but there was already $150 tax paid. Is the "net" cap gains now $350, or not?

-- Best regards Han email address is invalid

Read the message you quoted. You add the distributions to the cost basis. Also, when the fund makes a distribution, they reduce the NAV by the amount they distribute. As a result, when you eventually sell the shares your gain will be reduced (or your loss increased) by the amount of the distribution. So there's no double taxation, because your capital gains tax is reduced correspondingly.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

Nothing.

No.

No, it doesn't.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Pay them, just like other nonpayroll income.

If the capital gains distributions and dividends are reinvested (used to buy additional shares), the amount is added to basis. Don't forget to increase your share total by the appropriate amount.

No, there is no double taxation in this. There might be if you forget to add the amount of reinvestment to your cost basis, however.

No, the capital gain is $500. The tax you paid on the $1000 of reinvested dividends and capital gain distributions was ordinary income tax on that income, but has nothing to do with any subsequent capital gain on sale.

It doesn't work like that. The gain in your example would be $500 (not $350). What you're proposing would in effect be giving you a deduction (reduced gain) for your federal income taxes which of course are not deductible. Keep in mind in your example that upon disposition, you're only paying tax on the portion of the sale price that represents the GAIN over previously taxed income (i.e., the $500), you're not paying taxes on the entire $1500 proceeds, if you were paying tax on the 1500, then you would have double taxation on the first $1000.

Nothing. You just pay the taxes on the distribution.

No. Only reinvested amounts are added to the basis.

No, it doesn't. Adding the reinvested amounts to the basis is all that it takes to avoid and double taxation.

The $150 tax was paid on the $1000 that was used to purchase the reinvested shared. That is why you don't count the first $1000 (the basis) when computing the capital gain. Because that $1000 was already taxed money. The capital gain tax is paid only on the $500 gain that had not yet been taxed. No double taxation, and no double-counting of the tax money, either.

Not. The capital gains are $500, and that is the amount used to determine any taxes that are due. Taxes paid on the gains do not figure into the basis in any way whatsoever.

In 2003, your received a $1000 dividend and paid taxes on it.

Then you took $1000 and bought new shares. Reinvestment is actually two transactions: (a) the earnings payment and (b) a new purchase that you happen to make with the same amount as the earnings.

The basis of the new shares is (of course) $1000. If you sell the new shares (transaction (c)) for $1500 there's a $500 taxable profit because transaction (c) goes with transaction (b). In 2005, transaction (a) is irrelevant history; it has no bearing on the sale; it's already been resolved as far as taxation is concerned.