Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 15, 2015 09:10PM
Last year I received mutual fund short-term capital gain distributions from three payers (Vanguard, TDAmeritrade, and Calvert Investments). I am now astonished to see that all three of the 1099s treat these distributions as qualified dividends.

I just checked the current IRS Pub. 550, and it says "Distributions of net realized short-term capital gains are . . . included on Form 1099-DIV as ordinary dividends. Report them on your tax return as ordinary dividends."

Has anybody else noticed this? What gives? What should I do?

Re: short-term capital gain distributions "qualified"?
Posted by: 47Percent, March 15, 2015 09:58PM

My guess is that MF short term CG distributions include dividends from the underlying holdings.

Dividends from stocks/ETF can get 'qualified' treatment with just 90 days of holding.

This may explain what you are describing.

There are too many moving parts here that I don't know the actual workings of. This is just a guess.

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 15, 2015 10:31PM
In all three cases the mutual funds' income dividends and short-term capital gain distributions were paid separately.
In two of those cases the income dividend was paid 18 days after the ST capital gain distribution. The payers include both in "qualified dividends".

I am just incredulous that these mistakes (if that's what they are) haven't been discovered by now and corrected by the payers.

Re: short-term capital gain distributions "qualified"?
Posted by: Art, March 16, 2015 01:39AM
I would ignore S-T gains for tax purposes.

I assume they are not shown in a 1099-DIV numbered box?

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 16, 2015 03:02AM
The ST capital gain distributions are combined with the income dividends in Box 1b (Qualified dividends) of 1099-DIV.

Under what circumstances would they not be shown in a 1099-DIV numbered box, and why would you ignore them for tax purposes?

Re: short-term capital gain distributions "qualified"?
Posted by: kaneohe, March 16, 2015 01:43PM
Have you asked the reporting firm about this? This yr my broker 1099 had a reshuffling of reporting....although the total remained about the same , the amount in each category (non qual /STCG/Qualified/Foreign tax) changed so in the detail,they reported the original numbers and then the adjustment. Presumably the later numbers are correct.

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 16, 2015 06:11PM
I'm contacting the payers now. I discovered this during the weekend, and was hoping to get it resolved quickly so I could finish up my tax return.

Re: short-term capital gain distributions "qualified"?
Posted by: Sven, March 16, 2015 11:00PM
Am I missing something? Is not QD income preferable to STCG income, regardless of how and where things get reported? All this acacemic interest in what goes where put aside, it does seem like what you were sent should result in you having a lower total tax bill.

Re: short-term capital gain distributions "qualified"?
Posted by: Les Grans, March 17, 2015 06:29PM
Wanttoknow asks us "What should I do?" about reporting his (her?) mutual fund short-term capital gain distributions, which have been reported on the mutual funds' Forms 1099 as dividends.

Follow the MF's instructions. Not only is it possible that the tax results will be better, but also, that's the correct way to report mutual fund short-term capital gain distributions. They are dividends.

Don't ask why, just do it and smile.

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 17, 2015 07:22PM
Yes, they are dividends--but ST capital gain distributions are not qualified dividends (with a lower tax rate) according to the I.R.S.

Payers do make mistakes on their 1099's.

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 18, 2015 08:34PM
This has now been resolved--at least for my 2014 tax return.

I now realize that the Pub. 550 text I quoted in my original post:

"Distributions of net realized short-term capital gains are . . . included on Form 1099-DIV as ordinary dividends. Report them on your tax return as ordinary dividends."

actually says nothing about whether or not they can be qualified dividends, since all qualified dividends are also reported as ordinary dividends on the 1040.

Further scrutiny of Pub. 550 and the 1040 instructions also turns up nothing definitive.

I contacted all three payers, and got no enlightenment.

It still makes no sense, in that if I were to realize the short-term gains directly--not through a mutual fund--I'd be taxed at a non-qualified rate.

But since the I.R.S. instructions give me no basis for doing otherwise, I'm reporting the ST capital gain distributions as qualified dividends.

Re: short-term capital gain distributions "qualified"?
Posted by: Art, March 19, 2015 04:59AM
I'm still very surprised that a 1099-DIV would report short term gains in a numbered box.

They should not have to make you do any guessing about qualified dividends.

If they report ordinary dividends and qualified dividends (and other stuff which does not mention short term gains)
just throw the ordinary dividends on 1040 line 9a and the labeled qualified dividends on box 9b. And ignore the amount of short term gains.

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 19, 2015 06:16AM
Art,

The 1099-DIVs don't say anything about short-term capital gain distributions per se. I know they are reporting them in box 1b (qualified dividends) simply because of the $ amount.

To make this even screwier--the "Instructions for Recipient" on the back of the 1099-DIVs say:
"Box 1b. Shows the portion of the amount in box 1a that may be eligible for reduced capital gains rates."
But most of the time Box 1b shows just income dividends, which aren't capital gain.

Re: short-term capital gain distributions "qualified"?
Posted by: Art, March 20, 2015 03:28AM
I think you are making it too difficult for yourself.

And it's partly the fault of the reporting folks who introduced the term Short term capital gains into the picture.

Re: short-term capital gain distributions "qualified"?
Posted by: kaneohe, March 20, 2015 01:05PM
What did they say when you talked to them? Often funds report STCG in their monthly statements but they always vanish into invisibility when the 1099s arrive......so either they made a mistake in their monthly reporting or in the 1099. Maybe they can't stand to admit they made an error.........

re: instructions for box 1b.....they probably just mean that the reduced capital gains rates also apply to qualified dividends......

Re: short-term capital gain distributions "qualified"?
Posted by: Kaye Thomas, March 21, 2015 06:20PM
Mutual funds are not required to report to individual U.s. investors the portion of their distribution that is from short-term capital gains. This number can make a difference for other investors such as foreign investors, and the information may be provided to all investors even though it is relevant only to some.

Whatever portion of the mutual fund's distribution to shareholders is composed of short-term capital gain is nonqualified dividend, which is why wanttoknow wants to know what's going on here. I'd like to know as well. It doesn't seem possible that major outfits like this would have made a mistake in treating a distribution of short-term capital gain as qualified dividend, but I don't know how to account for the apparent discrepancy described in the original post.

Kaye Thomas
Fairmark.com

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 21, 2015 06:27PM
Kaneohe,

The Calvert fund person I talked to just said that he was sure it had been done correctly. The Walden fund person one of my brokers talked to just confirmed that they had designated the ST cap. gain dist. as qualified. Then I realized that the IRS instructions actually give no reason to question it being qualified.

When you say "Often funds report STCG in their monthly statements but they always vanish into invisibility when the 1099s arrive", do you mean they don't get taxed at all?




Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 21, 2015 06:51PM
Kaye,

Thanks so much!

The mutual fund companies involved are Calvert Investments and Walden, which is run by Boston Trust.

Do you have any insight as to why Pub. 550 says nothing about this? And even the Form 1040 Instructions, the instructions that would be read by the most taxpayers,
say nothing about this.

To make things even more confusing, in Pub. 550 when "capital gain distribution" is mentioned, it seems to refer only to long-term.


Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 21, 2015 07:04PM
Kaye,

Upon further thought, I realize that the reason why Pub. 550 and the 1040 instructions say nothing about ST capital gain distributions is probably that, as you say, mutual funds are not required to report them on the 1099-DIV.

But why aren't mutual funds required to report them on the 1099-DIV? Aren't taxpayers obligated to pay tax on them, and at a non-qualified rate?

In my case the $ amount is quite large.

Re: short-term capital gain distributions "qualified"?
Posted by: Kaye Thomas, March 21, 2015 07:07PM
Mutual funds are required to report them as part of ordinary dividends. They should be subtracted from that amount in arriving at qualified dividends.

Kaye Thomas
Fairmark.com



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