Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Re: short-term capital gain distributions "qualified"?
Posted by: kaneohe, March 21, 2015 07:24PM
wanttoknow Wrote:
-------------------------------------------------------
> Kaneohe,
>
> .........................
> 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?

No, I just meant that, as Kaye mentioned, they get reclassified into non-qualified dividends.....so part of the total ordinary and not part of the qualified.

btw........since this "error" favors you, I'd be more inclined to pick on another problem to spend time on..... :)
>
>
>
>



Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 22, 2015 02:06AM
kaneohe,

This stopped being a practical problem demanding a solution back on March 18, when I said "This has now been resolved--at least for my 2014 tax return." Since then I've just been responding to others' posts. But I often pursue questions for reasons other than immediate practical necessity. There's real meaning to my name "wanttoknow".

Re: short-term capital gain distributions "qualified"?
Posted by: kaneohe, March 22, 2015 04:06AM
Can you give an example of what was reported in the monthly statements and compare that to the 1099-DIV?
Based on my understanding it is something like:
Mo. statement: STCG=100; Div= 150

1099-DIV: Total ordinary dividends = 250
Qualified Div = 240

where the total of STCG & Div = Total ordinary div
but difference Total ord div less qual div << STCG

You might try escalating to a supervisor or perhaps
a more specialty group. Sometimes the front line phone reps might not be trained in some things.

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 22, 2015 05:26AM
My Vanguard statement:
12/12/14 Walden Equity S-T Capital gain $4,128.63
" " L-T Capital gain 33,056.73
" " Dividend 7,021.49

Vanguard 1099-DIV:
Includes other mutual funds, but has breakdown for each:
12/12/14 Walden Equity
Ordinary dividends (Box 1a) $11,150.12
Qualified dividends (Box 1b) 11,150.12
Capital gain distr. (Box 2a) 33,056.73

It's the same for the Calvert Equity Fund--i.e. ordinary dividends = qualified dividends--from both payers--except that the income dividend was paid on a different date from the ST & LT capital gain distributions.

I agree with your assessment of the people contacted at the mutual funds. But I didn't think I would be taken seriously there unless I presented some actual verbiage from the I.R.S. that countered how they had reported. I started to research this, and got to a statute which was total Greek to me. I then realized I can't afford right now to put the time and effort into pursuing this. Sometimes I have to restrain my "wanttoknow" tendencies.

Re: short-term capital gain distributions "qualified"?
Posted by: kaneohe, March 22, 2015 01:23PM
Thanks for that info....yes, I see why you are bothered.
Couldn't immediately find an IRS link but found this:
[www.fairmark.com]

[www.google.com]

There's even a VG one in the second link.

Good luck in restraining your n2k urge. Let us know what you find. I seriously doubt that they would challenge your premise that STCG are not QDIV but they may not want to admit errors either......if you can get them to acknowledge the former, that would be victory enough.

Re: short-term capital gain distributions "qualified"?
Posted by: Les Grans, March 22, 2015 01:41PM
Dreyfus's online tax information says that mutual funds' "short-term capital gain distributions" are to be taxed as "ordinary dividends" but it also says, quite matter-of-factly, that the "short-term capital gain distributions" that are taxed as ordinary dividends are *not* "qualified dividends". I don't have a Dreyfus statement and 1099-DIV right now to test this against how they actually report them, though.

By this description, your short-term capital gain distributions should be added to your ordinary dividends, but should not be added to your qualified dividends on your mutual funds' 1099-DIVs.

There was no attempt made by Dreyfus to explain "why?" but that's just as well, that's the IRS's job...

Re: short-term capital gain distributions "qualified"?
Posted by: Kaye Thomas, March 22, 2015 06:38PM
On this question the "why" is simple. The reason for allowing qualifying dividends to be taxed at a lower rate is that they represent income (more technically, earnings and profits, or E&P) of C corporations that in theory has already been subjected to tax at the corporate level. That's not the case with short-term capital gains realized by a mutual fund and paid out to shareholders. We can also look at the "why" from a different point of view suggested by wanttoknow: if a mutual fund can have short-term capital gains and pass them through to shareholders as qualified dividends, then mutual funds can provide better tax treatment for this category of income than you could obtain when investing your own portfolio of stocks and bonds. The intent of the flow-through approach to taxing mutual fund earnings is to provide tax treatment that is roughly as good as you would get investing your own portfolio (or owning an interest in an investment partnership) and certainly not to put mutual fund taxation on a superior footing over individual investing or partnerships.

Kaye Thomas
Fairmark.com

Re: short-term capital gain distributions "qualified"?
Posted by: Les Grans, March 23, 2015 01:28PM
It's possible that the IRS itself is having trouble explaining this conundrum. IRS's Publication 564 "Mutual Fund Distributions" was "obsoleted" in 2011. Maybe someone at IRS decided that the publication wasn't explaining things adequately...

But I'm a cynic.

Re: short-term capital gain distributions "qualified"?
Posted by: Kaye Thomas, March 23, 2015 06:15PM
I believe they simply decided the information in Pub 564 belonged in Pub 550, which makes sense. The treatment of mutual funds isn't their greatest effort, however. I have a warning in the latest edition of my capital gains book to ignore some of what's written about mutual funds in Pub 550.

Kaye Thomas
Fairmark.com

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, July 4, 2015 08:48AM
On June 10 I sent an e-mail to Boston Trust pointing out that their own prospectus says "distributions of . . . short-term capital gains will be taxed at the ordinary income tax rate applicable to the taxpayer." And I asked "Shouldn't a corrected 1099-DIV be issued not including the short-term capital gains distribution in Box 1b because it is not qualified income?" I have not received any response.

Now I have looked at their Annual Report for the year ended 3/31/15, and found the following for the Walden Equity Fund (the fund I hold):

"Dividends (to fund shareholders) - Net Investment Income: $1,402,464"

"Short-term realized gain distributions: $824,644"

"The Funds intend to designate the maximum amount allowable as taxed at a maximum rate of 15%."

"Qualified Dividends Income - Walden Equity Fund - 100.00%"

All this is part of their audited financial statement.

However, some of their other funds have percentages of less than 100%, so apparently whatever mistake they made with regard to the Walden Equity Fund was not made across the board.

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 7, 2017 09:58PM
Two years ago I started this thread because I had received 1014 1099-DIVs showing that mutual fund short-term capital gain distributions were qualified dividend income. Although originally I filed a 1014 return showing those distributions as qualified income, I later became convinced by the discussion in this thread, including some posts by Kaye Thomas, that they were not, and amended my return to subtract them from qualified dividend income.

Two years ago I had also tried to get clarification from the mutual fund companies, and their answers were that the distributions had been property classified, but I was not convinced that those answers were coming from knowledgeable people. I also researched the relevant IRS pubs, and found them hopelessly confusing.

Now the same thing has happened again for the 2016 short-term capital gain distribution from one of the same mutual funds of the Boston Trust family. This time I have managed to get the Boston Trust Manager of Mutual Fund Administration to look into this, and she informs me that the fund’s administrator confirmed that “the short-term capital gains were handled properly for 2016.  It is not always the case, but there are instances that it is appropriate to classify short-term capital gains as qualified dividend income.”

Does anyone know what those instances are?

Re: short-term capital gain distributions "qualified"?
Posted by: assassin, March 10, 2017 01:05PM
kaneohe mentioned it with Vanguard, but numerous fund companies are saying the same thing:

[personal.vanguard.com]
[www.guggenheiminvestments.com]
[www.americancentury.com]
[selectedfunds.com]
[www.roycefunds.com]

that pretty much rules out a clueless or rogue fund company. as for the "why", i'm finding less. but a few links:

[socialize.morningstar.com] (one poster has an interesting theory about the role of expenses in this.)

[business.cch.com] (doesn't outright mention expense math leaving a short-term capital gain as qualified, but gets into allocating expenses to different income sources, so i suspect at least some of it's relevant here.)

[www.irs.gov] (the revenue ruling referenced by the above link. says that "Section 871(k)(2)(D) defines qualified short-term gain as the excess of the RIC’s net short-term capital gain for the year over the RIC’s net long-term capital loss for such year". i dunno whether something being "qualified" for non-U.S. residents has any bearing on it being "qualified" for Americans, but the passage seems noteworthy.)

i won't pretend to understand this stuff, but a theme of the last two links seems to be leniency in how a fund designates things: "a RIC may designate the maximum amount permitted under each provision even if the aggregate of all of the amounts so designated exceeds the total amount of the RIC’s dividend distributions." or as the CCH link said, "the best of both worlds".

Re: short-term capital gain distributions "qualified"?
Posted by: wanttoknow, March 10, 2017 09:01PM
Thank you so much, assassin!

I don't understand all this stuff either, but now I feel I am on firm ground in reporting the ST CG distribution as qualified dividend income based simply on the 1099-DIV. I.e. it is now clear that this can be legit, and if it weren’t, in my case the onus would be on the fund.

Re Rev. Rul. 2005-31:

[www.irs.gov]

“Section 871(k)(2)(D) defines qualified short-term gain as the excess of the RIC’s net short-term capital gain for the year over the RIC’s net long-term capital loss for such year . . . .”

You said: “i dunno whether something being ‘qualified’ for non-U.S. residents has any bearing on it being ‘qualified’ for Americans.” The ruling actually says “The reduced tax rate applicable to distributions of qualified dividend income, and thus the designation as such a distribution, apply to individual taxpayers who are United States persons and do not apply to income received by a nonresident alien individual . . .”

However, 871(k)(2)(D) doesn’t apply to my case because the fund also paid a LT CG distribution. And, in the Vanguard link you gave, the first five funds with a qualified ST CG distribution also paid a LT CG distribution.

[personal.vanguard.com]

So in the case of my Boston Trust fund and these five Vanguard funds the qualification of the ST CG distribution must be due to something else. However, I do not feel I need to investigate this any further.

This was under my nose all the time, as it was in a Vanguard brokerage account that I received the Boston Trust ST CG distributions.

Re: short-term capital gain distributions "qualified"?
Posted by: assassin, March 11, 2017 02:56PM
glad i could help, even if i don't quite know what i'm talking about. :/ it'd be nice to fully grasp the "why".

my current take, based on further parsing those links, is along the lines of what a later poster in that Morningstar thread (AlvinSch) says about it being an accounting difference in reporting things.

given that the IRB's Revenue Ruling establishes how the fund can designate distribution types exceeding the total (as seen in the paragraph "Therefore, with respect to its dividend distributions ..."),

suppose i am a fund company, and my goals are:
1) making a webpage like this:
[personal.vanguard.com]
, and for its info to be usable by both U.S. and foreign investors.
2) listing as much ST capital gains distributions as possible to lower foreign investors' withholding tax.
3) not having the sum of the different categories of distributions exceed the total distribution, because that'd confuse the heck out of fundholders.

with those 3 goals in mind, i'm going to have to reduce one or more categories to accommodate ST capital gains, correct? that could include listing (Qualified) Dividends at a lower amount than i would if my only concern were U.S. investors.

but once i do that, i'm depriving U.S. holders of some qualified income. so to make use of the leeway expressed in the Revenue Ruling, and to "in spirit" designate as much Qualified Dividend Income as it'd allow me, i instead re-classify some of the Short-Term Capital Gains as Qualified.



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