Quick Investment Capital Gains Q

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Helping sister remotely on her taxes and we want into the following...

Investment fund (ETF type) apparently had some sort of dividend and the cash was used to purchase more shares...she gets a 1099 showing this as capital gains - although she didn't receive the money and it's still part of the fund.
Fund contact is saying she pays the gains now on this portion instead of later when a sale occurs.

This doesn't make sense to me as she hasn't received any payment on this. Would that be correct, and I'm out of line?

Thanks!

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It sounds like she did receive payment, she just used that to immediately make a further investment in the ETF (with a basis set by its price at that time).

My understanding (from the very little she knows about the investment - it was from parents) is that they likely rolled on an automatic basis.

I see your point though, if they have an automatic rollover set up - she technically 'got' the payment, then returned it for investment...

Yes, she pays the taxes on the dividends. The shares purchased with that money have a separate purchase date and price than the other shares.

She's got it set up for automatic reinvestment of dividends; it's just as if she'd gotten the money and then used it to purchase more shares, except it happens automatically.

doveroftke said:   Yes, she pays the taxes on the dividends. The shares purchased with that money have a separate purchase date and price than the other shares.

She's got it set up for automatic reinvestment of dividends; it's just as if she'd gotten the money and then used it to purchase more shares, except it happens automatically.

  This hits the nail on the head. Automatic reinvestment of dividends is a good strategy for equity growth, but the downside is that you do pay capital gains on those dividends (in taxable accounts). I wish it didn't work this way, though I presume the govt would lose out on a lot of tax revenue if they allowed a reinvestment loophole. Presumably this is why some companies don't issue dividends (and it's become more popular)--because the distribution forces a tax event for owners/shareholders and they'd rather keep that dividend value in the share price and give the shareholder the decision on when to take capital gains.

~~The fund paid out a capital gains distribution (fund owner's share of all the gains and losses from sales of the underlying investments). The fund owner will receive a 1099-DIV for this distribution regardless of whether the distribution is received in cash or used to automatically reinvest. This distribution must be included in gross income and taxed in the year it was distributed. However, this distribution increases the cost basis of the investment and once the fund is sold, the taxable gain reported at that time will be smaller. Ensure that she keeps track of this increased cost basis. (eg. fund originally purchased for 1000, then has a taxable 200 distribution this year-basis is now 1200. Later sold for 1500, gain is only 300, not 500). Broker is supposed to track this basis, but you should too.IMPORTANT: if your sister is in the 10% or 15% tax bracket, then all dividends and capital gains are taxed at 0%. Otherwise 15% or 20% depending on tax bracket. So therefore, although this distribution is added to taxable income, it is treated differently in the tax calculation.

RidicuRuss said:   .dup
 

  



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