Fund Distributions Only? Sharpen Your Pencil Anyway

If you didn’t sell any of your mutual funds last year, your only headache with the IRS will be in reporting any dividends and capital gains distributions received.

By now, you should have received a 1099-DIV from your fund company indicating the payments you received last year.

Your short-term capital gains (gains made on investments the fund held for less than a year) will be lumped together with your dividend income, because both are taxed at your ordinary income tax rate. Your short-term gains and dividends must be listed on IRS Schedule B.

Your long-term capital gains distributions, taxable at a top rate of 20%, go on line 13 of IRS Schedule D.

In years past, investors who had no other gains to report but fund distributions didn’t need to file Schedule D. But that changed last year.

Another note: If you sold shares of a fund that you held for less than six months, and you’re hoping to claim a short-term loss on your 1998 taxes, there’s a complication. If you received a capital gains distribution on those shares, you can only report as short-term losses that part of the loss that exceeds the amount of the gains.

Here’s an illustration: Let’s say you bought shares of a fund in April for $20 a share. In June, the fund made a capital gains distribution of $2 a share. In July, you sold the shares at $17.50 a piece.

If not for the distribution, you could have locked in a short-term loss of $2.50 a share ($20 minus $17.50 equals $2.50). But because you received gains of $2 a share, the IRS says you can report a short-term loss of only 50 cents a share.

However, this doesn’t mean you lose the remainder of the loss. The part of the loss that does not exceed the gain--in this case $2--converts to a long-term capital loss.