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This publication provides federal income tax information for individual shareholders of mutual funds or other regulated investment companies, including money market funds. It explains:
A comprehensive example, with filled-in forms, appears at the end of the publication.
In this publication, the term “mutual fund” means a mutual fund or other regulated investment company.
A mutual fund is a regulated investment company generally created by “pooling” funds of investors to allow them to take advantage of a diversity of investments and professional management.
A money market fund is a mutual fund that tries to increase current income available to shareholders by buying short-term market investments. Money market funds pay dividends and should not be confused with bank money market accounts that pay interest.
The rules in this publication do not apply to mutual fund shares held in individual retirement arrangements (IRAs), section 401(k) plans, and other qualified retirement plans. The value of the mutual fund shares and earnings allocated to you are included in your retirement plan assets and stay tax free generally until the plan distributes them to you. The tax rules that apply to retirement plan distributions are explained in the following publications.
See How To Get Tax Help near the end of this publication for information about getting these publications and forms.
A distribution you receive from a mutual fund may be an ordinary dividend, a qualified dividend, a capital gain distribution, an exempt-interest dividend, or a nondividend distribution. The fund will send you a Form 1099-DIV or similar statement telling you the kind of distribution you received. This section discusses the tax treatment of each kind of distribution, describes how to treat reinvested distributions, and explains how to report distributions on your return.
You may be treated as having received a distribution of capital gains even if the fund does not distribute them to you. See Undistributed capital gains under Capital Gain Distributions.If two or more persons, such as you and your spouse, hold shares as joint tenants, tenants by the entirety, or tenants in common, distributions on those shares are considered received by each of you to the extent provided by local law.
Dividends declared and made payable by mutual funds in October, November, or December are considered received by shareholders on December 31 of the same year even if the dividends are actually paid during January of the following year.
An ordinary dividend is a distribution by a mutual fund out of its earnings and profits. Include ordinary dividends that you receive from a mutual fund as dividend income on your individual income tax return.
Ordinary dividends are the most common type of dividends. They will be reported in box 1a of Form 1099-DIV or on a similar statement you receive from the mutual fund.
You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it.
These distributions are paid by mutual funds from their net realized long-term capital gains. The Form 1099-DIV (box 2a) you receive or the fund's statement will tell you the amount you are to report as a capital gain distribution. Capital gain distributions are taxed as long-term capital gains regardless of how long you have owned the shares in the mutual fund.
Mutual funds may keep some of their long-term capital gains and pay taxes on those undistributed amounts. You must report your share of these amounts as long-term capital gains, even though you did not actually receive a distribution. You can take a credit for your share of any tax paid because you are considered to have paid it.
A mutual fund may pay exempt-interest dividends to its shareholders if it meets certain requirements. These dividends are paid from tax-exempt interest earned by the fund. Since the exempt-interest dividends keep their tax-exempt character, do not include them in income. However, you may need to report them on your return. See Information reporting requirement , next. The mutual fund should send you a Form 1099-INT showing your exempt-interest dividends. Exempt-interest dividends should be shown on Form 1099-INT, box 8.
A nondividend distribution is a distribution that is not out of earnings and profits and is a return of your investment, or capital, in the mutual fund and is shown on Form 1099-DIV, box 3.
A nondividend distribution reduces your basis in the shares. Basis is explained under Keeping Track of Your Basis , later. Your basis cannot be reduced below zero. If your basis is zero, you must report the nondividend distribution on your tax return as a capital gain. Report this capital gain on Schedule D (Form 1040). Whether it is a long-term or short-term capital gain depends on how long you held the shares.
You bought shares in a mutual fund in 2005 for $12 a share. In 2006, you received a nondividend distribution of $5 a share. You reduced your basis in each share by $5 to an adjusted basis of $7. In 2007, you received a nondividend distribution of $1 per share and further reduced your basis in each share to $6. In 2008, you received a nondividend distribution of $2 per share. Your basis was reduced to $4. In 2009, the nondividend distribution from the mutual fund was $5 a share. You reduce your basis in each share to zero and report the excess ($1 per share) as a long-term capital gain on Schedule D (Form 1040).
Most mutual funds permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. You must report the reinvested amounts the same way as you would report them if you received them in cash. This means that reinvested ordinary dividends and capital gain distributions generally must be reported as income. Reinvested exempt-interest dividends generally are not reported as income. Reinvested return of capital distributions are reported as explained under Nondividend Distributions , earlier. See Keeping Track of Your Basis , later, to determine the basis of the additional shares.
You must report mutual fund distributions on Form 1040 or Form 1040A. You cannot report mutual fund distributions on Form 1040EZ.
You cannot use Form 1040A and must use Form 1040 in either of the following situations.
| If you receive . . . | AND . . . | Then report the distribution on: | |
|---|---|---|---|
| Form 1040 . . . | Form 1040A . . . | ||
| ordinary dividends (Form 1099-DIV, box 1a) |
| line 9a | line 9a |
|
|
| |
| qualified dividends (Form 1099-DIV, box 1b) |
|
| |
| capital gain distributions (Form 1099-DIV, box 2a) | you do not have to file Schedule D (Form 1040) |
|
|
| you have to file Schedule D (Form 1040) (see Schedule D instructions for line 13) | Schedule D (Form 1040), line 13 | you must use Form 1040; you cannot use Form 1040A | |
| section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) | Schedule D (Form 1040) (see the Schedule D instructions) | you must use Form 1040; you cannot use Form 1040A | |
| nondividend distributions (Form 1099-DIV, box 3) | generally not reported* | generally not reported* | |
| exempt-interest dividends (Form 1099-INT, box 8) | line 8b | line 8b | |
| undistributed capital gains (Form 2439, boxes 1a-1d) | Schedule D (Form 1040) (see the Schedule D instructions) | you must use Form 1040; you cannot use Form 1040A | |
| * Report any amount in any excess of your basis in your mutual fund shares on Schedule D (Form 1040). Use line 8 if you held the shares more than 1 year. Use line 1 if you held your mutual fund shares 1 year or less. |
You should keep track of your basis in mutual fund shares because you need the basis to figure any gain or loss on the shares when you sell, exchange, or redeem them.
As explained in the following paragraphs, original basis depends on how you acquired your shares.
The original basis of mutual fund shares you bought is usually their cost or purchase price. The purchase price usually includes any commissions or load charges paid for the purchase.
You bought 100 shares of Fund A for $10 a share. You paid a $50 commission to the broker for the purchase. Your cost basis for each share is $10.50 ($1,050 ÷ 100).
When you buy or sell shares in a fund, keep the confirmation statements you receive. The statements show the price you paid for the shares when you bought them and the price you received for the shares when you disposed of them. The information from the confirmation statement when you purchased the shares will help you figure your basis in the fund.
The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply.
The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares).
This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge.
The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. This rule applies even if the distribution is an exempt-interest dividend that you do not report as income.
When you acquire shares through reinvestment, keep the statements that show each date, amount, and number of full or fractional shares purchased. Keep track of any adjustments to basis of the shares as they occur. Generally, you must know the basis per share to compute gain or loss when you dispose of the shares. This is explained under Identifying the Shares Sold, later.To determine your original basis of mutual fund shares you acquired by gift, you must know:
If the fair market value (FMV) of the shares at the time of the gift was less than the adjusted basis to the donor at the time of the gift, your basis for gain on their disposition is the donor's adjusted basis. Your basis for loss is the FMV of the shares at the time of the gift. In this situation, it is possible to sell the shares at neither a gain nor a loss because of the basis you have to use.
You are given mutual fund shares with an adjusted basis of $10,000 at the time of the gift. The FMV of the shares at the time of the gift is $9,000. You later sell the shares for $9,500. The basis for figuring a gain is $10,000, so there is no gain. There also is no loss, since the basis for figuring a loss is $9,000. In this situation, you have neither a gain nor a loss.
If you inherited shares in a mutual fund, your original basis is generally the fair market value (FMV) (the last quoted public redemption price) on the date of the decedent's death, or the alternate valuation date if chosen for estate tax purposes.
In community property states, you and your spouse generally are considered to each own half the estate (excluding separate property). If one spouse dies and at least half of the community interest is includible in the decedent's gross estate (whether or not the estate is required to file a return), the FMV of the community property at the date of death becomes the basis of both halves of the property. For example, if the FMV of the entire community interest in a mutual fund is $100,000, the basis of the surviving spouse's half of the shares is $50,000. The basis of the heirs' half of the shares also is $50,000. In determining the basis of assets acquired from a decedent, property held in joint tenancy is community property if its status was community property under state law.
A different basis rule applies to inherited shares that you or your spouse gave the decedent within the 1-year period ending on the date of the decedent's death if, on the date of the gift, the shares were appreciated property. In this situation, the basis of the inherited shares is the decedent's adjusted basis in them immediately before his or her death, rather than their FMV. This basis rule also applies if the decedent's estate (or a trust of which the decedent was the grantor) sells the shares instead of distributing them to you, and you are entitled to the proceeds.
Appreciated property is any property (including mutual fund shares) whose FMV is more than its adjusted basis.
This basis rule does not apply if the decedent died before 1982 or you gave the shares to the decedent before August 14, 1981.
After you acquire mutual fund shares, you may need to make adjustments to your basis. The adjusted basis of your shares is your original basis (defined earlier), increased or reduced as described here.
You do not reduce your basis for distributions from the fund that are exempt-interest dividends.
| Mutual Fund | Acquired1 | Adjustment to Basis Per Share | Adjusted2 Basis Per Share | Sold or redeemed | |||||||
| Date | Number of Shares | Cost Per Share | Date | Number of Shares | |||||||
| 1 Include share received from reinvestment of distributions. |
| 2 Cost plus or minus adjustments. |
When you sell or exchange your mutual fund shares, or if they are redeemed (a redemption), you will generally have a taxable gain or a deductible loss. This also applies to shares of a tax-exempt mutual fund. Sales, exchanges, and redemptions are all treated as sales of capital assets. The amount of the gain or loss is the difference between your adjusted basis (defined earlier) in the shares and the amount you realize from the sale, exchange, or redemption. This is explained further under Gains and Losses , later.
In general, a sale is a transfer of shares for money only.
An exchange is a transfer of shares in return for other shares.
You must give the broker your correct taxpayer identification number (TIN). Generally, an individual will use his or her social security number as the TIN. If you do not provide your TIN, your broker is required to withhold tax on the gross proceeds of a transaction. For 2010, the withholding rate is 28%. In addition, you may be penalized.
To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficult. However, shares are generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more difficult. You can choose to use either a cost basis or an average basis to figure your gain or loss.
You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund.
To figure cost basis, you can choose one of the following methods.
If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure your gain or loss. You will adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices and times, if you:
You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.
You can figure your gain or loss using an average basis only if you acquired the shares at various times and prices, and you left the shares on deposit in an account handled by a custodian or agent who acquires or redeems those shares.
To figure average basis, you can use one of the following methods.
Once you elect to use an average basis, you must continue to use it for all accounts in the same fund. (You must also continue to use the same method.) However, you may use the cost basis (or a different method of figuring the average basis) for shares in other funds, even those within the same family of funds.
You own two accounts that hold shares of the income fund issued by Company A. You also own 100 shares of the growth fund issued by Company A. If you elect to use average basis for the first account of the income fund, you must use average basis for the second account. However, you may use cost basis for the growth fund.
You may be able to find the average basis of your shares from information provided by the fund.
You bought 400 shares in the LJO Mutual Fund: 200 shares on May 15, 2008, and 200 shares on May 14, 2009. On November 10, 2009, you sold 300 shares. The basis of all 300 shares sold is the same, but you held 200 shares for more than 1 year, so your gain or loss on those shares is long term. You held 100 shares for 1 year or less, so your gain or loss on those shares is short term.
| 1) | Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) | $ |
| 2) | Enter the total number of shares you owned in the fund just before the sale | |
| 3) | Divide the amount on line 1 by the amount on line 2. This is your average basis per share | $ |
| 4) | Enter the number of shares you sold | |
| 5) | Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold | $ |
You bought 300 shares in the LJP Mutual Fund: 100 shares in 2006 for $1,000 ($10 per share); 100 shares in 2007 for $1,200 ($12 per share); and 100 shares in 2008 for $2,600 ($26 per share). Thus, the total cost of your shares was $4,800 ($1,000 $1,200 + $2,600). On May 11, 2009, you sold 150 shares. The basis of the shares you sold is $2,400 ($16 per share), figured as follows.
| 1) | Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) | $4,800 |
| 2) | Enter the total number of shares you owned in the fund just before the sale | 300 |
| 3) | Divide the amount on line 1 by the amount on line 2. This is your average basis per share | $16 |
| 4) | Enter the number of shares you sold | 150 |
| 5) | Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold | $2,400 |
The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis of the shares sold. The next time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made a subsequent adjustment to basis).
The facts are the same as in Example 1 , except that you sold an additional 50 shares on December 17, 2009. You do not need to recompute the average basis of the 150 shares you owned at that time because you acquired or sold no shares, and had no other adjustments to basis, since the last sale. Your basis is the $16 per share figured earlier.
The facts are the same as in Example 1 , except that you bought an additional 150 shares at $14 a share on September 17, 2009, and then sold 50 shares on December 18, 2009. The total adjusted basis of all the shares you owned just before the sale is $4,500, figured as follows.
| 1) | Basis of remaining shares ($16 x 150) | $2,400 |
| 2) | Cost of shares acquired 9/17/09 ($14 x 150) | $2,100 |
| 3) | Total adjusted basis of all shares owned ($2,400 + $2,100) | $4,500 |
The basis of the shares sold is $750 ($15 a share), figured as follows.
| 1) | Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) | $4,500 |
| 2) | Enter the total number of shares you owned in the fund just before the sale | 300 |
| 3) | Divide the amount on line 1 by the amount on line 2. This is your average basis per share | $15 |
| 4) | Enter the number of shares you sold | 50 |
| 5) | Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold | $750 |
In the double-category method, all shares in an account at the time of each disposition are divided into two categories: short term and long term. Shares held 1 year or less are short term. Shares held longer than 1 year are long term. The basis of each share in a category is the average basis for that category. This is the total remaining basis of all shares in that category at the time of disposition divided by the total shares in the category at that time. To use this method, you specify, to the custodian or agent handling your account, from which category the shares are to be sold or transferred. The custodian or agent must confirm in writing your specification. If you do not specify or receive confirmation, you must first charge the shares sold against the long-term category and then charge any remaining shares sold against the short-term category.
After you have held a mutual fund share for more than 1 year, you must transfer that share from the short-term category to the long-term category. The basis of a transferred share is its actual cost or other basis to you unless some of the shares in the short-term category have been disposed of. In that case, the basis of a transferred share is the average basis of the undisposed shares at the time of the most recent disposition from this category.
You choose to use the average basis of mutual fund shares by clearly showing on your income tax return, for each year the choice applies, that you used an average basis in reporting gain or loss from the sale or transfer of the shares. You must specify whether you used the single-category method or the double-category method in determining average basis. This choice is effective until you get permission from the IRS to revoke it.
If your account includes shares that you received by gift, and the fair market value of the shares at the time of the gift was not more than the donor's basis, special rules apply. You cannot choose to use the average basis for the account unless you submit a statement with your initial choice. It must state that the basis used in figuring the average basis of the gift shares will be the FMV at the time of the gift. This statement applies to gift shares received before and after making the choice, as long as the choice to use the average basis is in effect.
| This is an example showing two different ways to figure basis. It compares the cost basis using the FIFO method with the average basis using the single-category method. | ||||
| Date | Action | Share Price | No. of Shares | Total Shares Owned |
| 2/6/08 | Invest $4,000 | $25 | 160 | 160 |
| 8/7/08 | Invest $4,800 | $20 | 240 | 400 |
| 12/18/08 | Reinvest $300 dividend | $30 | 10 | 410 |
| 10/1/09 | Sell 210 shares for $6,720 | $32 | 210 | 200 |
| COST BASIS (FIFO) | To figure the basis of the 210 shares sold on 10/1/09, use the share price of the first 210 shares you bought, namely the 160 shares you purchased on 2/6/08 and 50 of those purchased on 8/7/08. | |||
| $4,000 (cost of 160 shares on 2/6/08) | ||||
| + | $1,000 (cost of 50 shares on 8/7/08) | |||
| Basis = | $5,000 | |||
| AVERAGE BASIS (single-category) | To figure the basis of the 210 shares sold on 10/1/09, use the average basis of all 410 shares owned on 10/1/09. | |||
| $9,100 (cost of 410 shares) | ||||
| ÷410 (number of shares) | ||||
| $22.20 (average basis per share) | ||||
| $22.20 | ||||
| ×210 | ||||
| Basis = | $4,662 |
You figure gain or loss on the disposition of your shares by comparing the amount you realize with the adjusted basis of your shares. If the amount you realize is more than the adjusted basis of the shares, you have a gain. If the amount you realize is less than the adjusted basis of the shares, you have a loss.
The amount you realize from a disposition of your shares is the money and value of any property you receive for the shares disposed of, minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees).
If you sell mutual fund shares at a loss and within 30 days before or after the sale you buy, acquire in a taxable exchange, or acquire a contract or option to buy substantially identical shares, you have a wash sale. You cannot deduct losses from wash sales.
You sold 100 shares of Fund HIJ for $2,500. You paid a $75 commission to the broker for handling the sale. Your Form 1099-B shows that the net sales proceeds, $2,425 ($2,500 − $75), were reported to the IRS. Report $2,425 in column (d) of Schedule D (Form 1040).
You sold 200 shares of Fund KLM for $10,000. You paid a $100 commission at the time of the sale. You bought the shares for $5,000. The broker reported the gross proceeds to IRS on Form 1099-B, so you enter $10,000 in column (d) of Schedule D (Form 1040) and increase your basis in column (e) to $5,100.
Whether you use line 1 (for a short-term gain or loss) or line 8 (for a long-term gain or loss) of Schedule D (Form 1040) depends on how long you held the shares, discussed next.
When you dispose of your mutual fund shares, you must determine your holding period. Your holding period determines whether the gain or loss is a short-term capital gain or loss or a long-term capital gain or loss.
If you hold the shares for 1 year or less, your gain or loss will be a short-term gain or loss.
If you hold the shares for more than 1 year, your gain or loss will be a long-term gain or loss.
To find out how long you have held your shares, begin counting on the day after the trade date on which you bought the shares. (Do not count the trade date itself.) The trade date on which you dispose of the shares is counted as part of your holding period.
If you bought shares on January 7, 2008 (trade date), and sold them on January 7, 2009 (trade date), your holding period would not be more than 1 year. If you sold them on January 8, 2009, your holding period would be more than 1 year (12 months plus 1 day).
If you receive a gift of mutual fund shares and your basis is determined by the donor's basis, your holding period is considered to have started on the same day that the donor's holding period started.
If your dividends and capital gain distributions are reinvested in new shares, the holding period of each new share begins the day after that share was purchased. Therefore, if you sell both the new shares and the original shares, you might have both short-term and long-term gains and losses.
Special rules may apply if you have a short-term loss on the sale of shares on which you received an exempt-interest dividend or a capital gain distribution.
On January 7, 2009, you bought a mutual fund share for $40. On February 4, 2009, the mutual fund paid a $5 dividend from tax-exempt interest, which is not taxable to you. On February 11, 2009, you sold the share for $34. If it were not for the tax-exempt dividend, your loss would be $6 ($40 − $34). However, you must increase the sales price from $34 to $39 (to account for the $5 portion of the loss that is not deductible). You can deduct only $1 as a short-term capital loss.
Generally, if you received capital gain distributions (or had to report undistributed capital gains) on mutual fund shares that you held for 6 months or less and sold at a loss, report only the part of the loss that is more than the capital gain distribution (or undistributed capital gain) as a short-term capital loss. The rest of the loss is reported as a long-term capital loss.
On April 10, 2009, you bought a mutual fund share for $20. On June 26, 2009, the mutual fund paid a capital gain distribution of $2 a share, which is taxed as a long-term capital gain. On July 14, 2009, you sold the share for $17.50. If it were not for the capital gain distribution, your loss would be a short-term loss of $2.50 ($20 − $17.50). However, the part of the loss that is not more than the capital gain distribution ($2) must be reported as a long-term capital loss. The remaining $0.50 of the loss can be reported as a short-term capital loss.
Separate your short-term gains and losses from your long-term gains and losses on all the mutual fund shares and other capital assets you disposed of during the year. Then determine your net short-term gain or loss and your net long-term gain or loss.
If you are reporting capital gain distributions on Form 1040A, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A instructions to figure your tax. See How To Report , earlier, to see whether you can report your capital gain distributions on Form 1040A.
If you are reporting capital gain distributions on Form 1040, but are not required to file Schedule D (Form 1040), use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax. See How To Report , earlier, to see whether you must file Schedule D (Form 1040).
If you are required to file Schedule D (Form 1040), use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax if both of the following are true.
If you have any collectibles gain, exclusion from eligible gain on qualified small business stock, or unrecaptured section 1250 gain, you will have to use the Schedule D Tax Worksheet in the Schedule D instructions to figure your tax.
The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.
The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than any net short-term capital loss.
The maximum capital gain rate can be 0%, 15%, 25%, or 28%. See Table 4.
If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies.| IF your net capital gain is from ... | THEN your maximum capital gain rate is ... |
| collectibles gain | 28% |
| eligible gain on qualified small business stock minus the section 1202 exclusion | 28% |
| unrecaptured section 1250 gain | 25% |
| other gain*, and the regular tax rate that would apply is 25% or higher | 15% |
| Other gain*, and the regular tax rate that would apply is lower than 25% | 0% |
| *“Other gain” means any gain that is not collectibles gain, eligible gain on qualified small business stock, or unrecaptured section 1250 gain. |
You have a capital gain distribution that is a section 1202 gain, so the maximum capital gain rate on the distribution would be 28%. Because you are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate does not apply.
If Schedule D (Form 1040), Part III, line 16, shows a loss, your allowable capital loss deduction is the smaller of:
Enter your allowable loss on Form 1040, line 13.
Bob and Gloria sold all of their shares in a mutual fund. The sale resulted in a capital loss of $7,000. They had no other capital transactions. Their taxable income was $26,000. On their joint 2009 return, they can deduct $3,000. The unused part of the loss, $4,000 ($7,000 – $3,000), can be carried over to 2010.
If Bob and Gloria's capital loss had been $2,000, their capital loss deduction would have been $2,000. They would have no carryover.
Capital loss carryovers from separate returns are combined if you now file a joint return. However, if you once filed jointly and are now filing separately, a capital loss carryover from the joint return can be deducted only on the separate return of the spouse who actually had the loss.
You can generally deduct the expenses of producing taxable investment income. These include expenses for investment counseling and advice, legal and accounting fees, and investment newsletters. These expenses are deductible as miscellaneous itemized deductions to the extent that they exceed 2% of your adjusted gross income. See chapter 3 in Publication 550 for more information.
Interest paid on money to buy or carry investment property is also deductible, but the deduction may be limited. See Limit on Investment Interest Expense , later.
Most mutual funds are publicly offered. Expenses of publicly offered mutual funds are not treated as miscellaneous itemized deductions. This is because these mutual funds report only the net amount of investment income after your share of the investment expenses has been deducted.
Contact your mutual fund if you are not sure whether it is nonpublicly offered.
You cannot deduct expenses that are for the collection or production of exempt-interest dividends. Expenses must be allocated if they were for both taxable and tax-exempt income. One accepted method for allocating expenses is to divide them in the same proportion that each type of income from the mutual fund is to your total income from the fund. To find the part of the expenses that relates to the tax-exempt income, you must first divide your tax-exempt income by your total income. Then multiply your expenses by the result. You cannot deduct this part.
William received $600 in dividends from his mutual fund: exempt-interest dividends of $480 and taxable dividends of $120. In earning this income, he had a $50 expense for a newsletter on mutual funds. William divides the exempt-interest dividends by the total dividends to figure the part of the expense that is not deductible. Therefore, 80% ($480 ÷ $600) of William's expense is for exempt-interest income. He cannot deduct $40 (80% of $50) of the expense. William may claim the balance of the expense, $10, as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit. That is the part of the expense allocable to the taxable dividends.
The amount you can deduct as investment interest expense may be limited in two different ways. First, you may not deduct the interest on money you borrow to buy or carry shares in a mutual fund that distributes only exempt-interest dividends. If the fund also distributes taxable dividends, you must allocate the interest between the taxable and nontaxable income. Allocate the interest as explained under Expenses allocable to exempt-interest dividends , earlier.
Second, your deduction for investment interest expense is limited to the amount of your net investment income.
Jane, a single taxpayer, has investment income for the year of $12,000. Jane's investment expenses (other than interest expense) directly connected with the production of income were $980 after subtracting the 2% limit on miscellaneous itemized deductions. Jane incurred $12,500 of investment interest expense during the year. She had no passive activity losses. Jane figures net investment income and the limit on her investment interest expense deduction as follows:
| Total investment income | $12,000 | |
| Subtract: | Investment expenses (other than interest) | –980 |
| Net investment income | $11,020 |
For the year, Jane's investment interest expense deduction is limited to $11,020 (her net investment income). The disallowed interest expense of $1,480 ($12,500 − $11,020) can be carried forward to the following year as explained next under Carryover .
You can carry forward to the next tax year the investment interest that you cannot deduct because of the limit. You can deduct the interest carried forward to the extent that your net investment income exceeds your investment interest in that later year.
Robert and Janice Martin have the following four sources of investment income to report on their 2009 tax return. Page 1 of their Schedule D (Form 1040) is shown later. Page 2 is not illustrated.
Robert and Janice keep track of all their basis adjustments on their Mutual Fund Record, shown later. They show the nondividend distributions and the undistributed capital gains from Mutual Fund S and the reinvested dividends from Mutual Fund R. They do not show the exempt-interest dividends from Mutual Fund X because those dividends do not change their basis in the shares. The Martins keep this record with their mutual fund documents, and they use it to report their 2009 sale of Mutual Fund S.
| Mutual Fund | Acquired1 | Adjustment to Basis Per Share | Adjusted2 Basis Per Share | Sold or Redeemed | |||||||
| Date | Number of Shares | Cost Per Share | Date | Number of Shares | |||||||
| MUTUAL FUND S | 7-12-95 | 200 | 10.00 | 12-31-97 | 12-31-98 | 12-31-06 | 12-31-07 | 8-29-08 | 9.98 | 10-5-09 | 200 |
| (.05) | (.02) | (.04) | .03 | .06 | |||||||
| MUTUAL FUND X | 4-19-07 | 87.54 | 29.70 | ||||||||
| MUTUAL FUND R | 6-12-09 | 153.16 | 24.81 | ||||||||
| 12-29-09 | 13.03 | 25.01 | |||||||||
| 1 Include share received from reinvestment of distributions. |
| 2 Cost plus or minus adjustments. |
Before you begin:
|
| 1. | Enter the amount from Form 1040, line 43. However, if you are filing Form 2555 or Form 2555-EZ (relating to foreign earned income), enter the amount from line 3 of the worksheet on page 38 | 1. | 36,505 | ||||||||||||
| 2. | Enter the amount from Form 1040, line 9b* | 2. | 470 | ||||||||||||
| 3. | Are you filing Schedule D?* | ||||||||||||||
| Yes. | Enter the smaller of line 15 or 16 of Schedule D. If either line 15 or line 16 is a loss, enter -0- | 3. | 1,265 | ||||||||||||
| No. | Enter the amount from Form 1040, line 13 | ||||||||||||||
| 4. | Add lines 2 and 3 | 4. | 1,735 | ||||||||||||
| 5. | If you are claiming investment interest expense on Form 4952, enter the amount from line 4g of that form. Otherwise, enter -0- | 5. | -0- | ||||||||||||
| 6. | Subtract line 5 from line 4. If zero or less, enter -0- | 6. | 1,735 | ||||||||||||
| 7. | Subtract line 6 from line 1. If zero or less, enter -0- | 7. | 34,770 | ||||||||||||
| 8. | Enter the smaller of: | ||||||||||||||
| • The amount on line 1, or | |||||||||||||||
| • $33,950 if single or married filing separately, | 8. | 36,505 | |||||||||||||
| $67,900 if married filing jointly or qualifying widow(er), $45,500 if head of household. td> | |||||||||||||||
| 9. | Is the amount on line 7 equal to or more than the amount on line 8? | ||||||||||||||
| Yes. | Skip lines 9 and 10; go to line 11 and check the "No" box. | ||||||||||||||
| No. | Enter the amount from line 7 | 9. | 34,770 | ||||||||||||
| 10. | Subtract line 9 from line 8 | 10. | 1,735 | ||||||||||||
| 11. | Are the amounts on lines 6 and 10 the same? | ||||||||||||||
| Yes. | Skip lines 11 through 14; go to line 15. | ||||||||||||||
| No. | Enter the smaller of line 1 or line 6 | 11. | |||||||||||||
| 12. | Enter the amount from line 10 (if line 10 is blank, enter -0-) | 12. | |||||||||||||
| 13. | Subtract line 12 from line 11 | 13. | |||||||||||||
| 14. | Multiply line 13 by 15% (.15) | 14. | |||||||||||||
| 15. | Figure the tax on the amount on line 7. Use the Tax Table or Tax Computation Worksheet, whichever applies | 15. | 4,381 | ||||||||||||
| 16. | Add lines 14 and 15 | 16. | 4,381 | ||||||||||||
| 17. | Figure the tax on the amount on line 1. Use the Tax Table or Tax Computation Worksheet, whichever applies | 17. | 4,644 | ||||||||||||
| 18. | Tax on all taxable income. Enter the smaller of line 16 or line 17. Also include this amount on Form 1040, line 44. If you are filing Form 2255 or 2555-EZ, do not enter this amount on Form 1040, line 44. Instead, enter it on line 4 of the worksheet on page 38 | 18. | 4,381 | ||||||||||||
| *If you are filing Form 2555 or Form 2555-EZ, see the footnote in the worksheet on page 38 before completing this line. | |||||||||||||||
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