What Is the Tax Consequence of Capital Gains Stock Distribution Being Reinvested?
The Internal Revenue Service taxes many forms of income aside from pay earned at a job, including gains that investors make on their investments. When you buy an asset -- such as a share of stock or a mutual fund -- and sell it later on at a higher price, the profit you make is subject to capital gains tax. In some cases, you may receive cash distributions for holding stocks or mutual funds, which are also subject to taxation.
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Tax on Capital Gains Distributions
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A capital gains distribution is cash that you receive for holding shares of a mutual fund when mutual fund managers sell assets such as stocks for a profit. The IRS says that capital gains distributions received are taxed at the long-term capital gains tax rate regardless of how long you own a mutual fund. The long-term capital gains rate is capped at 15 percent. In some cases, you may have your mutual fund account set up to automatically reinvest capital gains distributions. Reinvestment means distributions are used to buy more shares of the mutual fund and you never actually receive a cash distribution. Reinvested capital gains distributions are still subject to taxation and must be reported the same way as those received in cash.
Reporting Capital Gains Distributions
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Capital gains distributions from mutual funds are reported to you on Form 1099-DIV. The IRS says that gains must be reported to the IRS on Form 1040, line 13, or Schedule D (Form 1040), line 13 depending on your situation (see Resources).
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Taxes on Dividends
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Dividends are income distributions that corporations sometimes pay to stock shareholders and that mutual fund sometimes pay to their shareholders. Cash dividends received or reinvested are subject to taxation. The IRS state that dividend income is taxed at as ordinary income unless dividends received are considered "qualified dividends." Dividends must be paid by a U.S. corporation or a qualified foreign corporation and meet certain holding period requirements to count as qualified dividends.
Considerations
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Some corporations offer stock dividends rather than cash dividends. A stock dividend means the company gives you additional shares of stock periodically instead of cash payments. According to the IRS, stock dividends are generally not considered taxable income and do not have to be reported on income tax returns.
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