Question

Fred bought $10,000 of Big Mutual Fund shares. 3 months later, the mutual fund distributes capital gains dividends of $1,000 to Fred. How is the $1,000 treated on Fred’s tax return?

a.). Not taxed to Fred, but subtracted from the basis of the mutual fund shares

b.). Taxed to Fred as long-term capital gain

c.). Taxed to Fred as ordinary income

d.). Taxed to Fred and short term capital gain

Answer 1

a. Not taxed to Fred, but subtracted from the basis of the mutual fund shares.

Usually capital gains are taxable for the investors, however in the case of tax on mutual funds dividends Distribution Tax is paid by the Asset Management Company on behalf of the investors.

Additionally Fred will be taxed only if he decides to sell his investments.