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Hi-

I'm a little confused by tax accounting for mutual funds.

Let's say that I bought the Gizmo Fund (symbol WHIZX) on 1/2/98 for $10,000.

In 1998, I got a letter saying that there were:
$1,000 in long term gains
$500 in short term gains
$150 in dividends

In 1999, I got another letter:

$2,000 in long term gains
$700 in short term gains
$350 in dividends

On 1/2/00, I sold the fund for $12,000.

What do I owe taxes on, and when?

Thanks,
Harold

PS - I apologize if this question has been asked before - I did a search and looked through the FAQ's.
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Since you got a letter and not a check, let me assume you have chosen to have the dividends from this mutual fund reinvested in additional shares.
In 1998, you received $1650 in dividends, part of which was capital gain, and tax on all of this was due April 15, 1999. At this point your cost basis in the fund became $11650. ($10000 you put in plus the dividends). You should have listed the dividend, long and short term gains in the appropriate places on schedule B.
In 1999, you get $3050. The Dividend and short term gains are taxed as ordinary income, the long term gain taxed as capital gains. Both are due with you 1999 tax return and your basis in the fund rises to $14710.
In 2000, you sold the fund for $12000. You now declare a long term loss of $2710, the difference between your cost basis and what you sold the fund for. You also at this point may be wishing you had sold the fund on December 31, 1999, but it is now too late for that.
Hope this helps. Chris
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Let me add that if you are using Turbotax, as I do, you put everything on Schedule B and it allocates the capital gain to Schedule D; if you are doing all this by hand (a real chore) the long and short term gains go on Schedule D. Chris
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You must follow the letters, which should be substitute 1099's. In 1998 you owe tax on the income reported to you then. Long Terms are typically taxed at 20%. Short term gains and dividends are taxed at your ordinary tax rate. Keep track of this income reported to you, especially if you reinvest all gains and dividends back into the fund. Paying tax on the income now will increase your basis in the fund. When you sell, you will be able to reduce your gain.
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<< Let me add that if you are using Turbotax, as I do, you put everything on Schedule B and it allocates the capital gain to Schedule D; if you are doing all this by hand (a real chore) the long and short term gains go on Schedule D. >>

No MF distributions of short-term cap gains are taxed as dividends and reported on Schedule B if applicable. Only long-term cap gain distributions go on Schedule D.

Phil Marti
Tax Preparer
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Chris-

<<In 1998, you received $1650 in dividends, part of which was capital gain, and tax on all of this was due April 15, 1999. At this point your cost basis in the fund became $11650. ($10000 you put in plus the dividends). You should have listed the dividend, long and short term gains in the appropriate places on schedule B.
In 1999, you get $3050. The Dividend and short term gains are taxed as ordinary income, the long term gain taxed as capital gains. Both are due with you 1999 tax return and your basis in the fund rises to $14710.
In 2000, you sold the fund for $12000. You now declare a long term loss of $2710, the difference between your cost basis and what you sold the fund for. You also at this point may be wishing you had sold the fund on December 31, 1999, but it is now too late for that. >>

If I understand correctly,

1998 - $650 taxed at short term, $1,000 at long term.

1999 - $1,050 taxed at short term, $2,000 at long term.

2000 - Sell for $12,000 - take loss of $2,700.

How much of this loss is short-term and how much long-term?

Mike
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<< <<In 1998, you received $1650 in dividends, part of which was capital gain, and tax on all of this was due April 15, 1999. At this point your cost basis in the fund became $11650. ($10000 you put in plus the dividends). You should have listed the dividend, long and short term gains in the appropriate places on schedule B.
In 1999, you get $3050. The Dividend and short term gains are taxed as ordinary income, the long term gain taxed as capital gains. Both are due with you 1999 tax return and your basis in the fund rises to $14710.
In 2000, you sold the fund for $12000. You now declare a long term loss of $2710, the difference between your cost basis and what you sold the fund for. You also at this point may be wishing you had sold the fund on December 31, 1999, but it is now too late for that. >>

If I understand correctly,

1998 - $650 taxed at short term, $1,000 at long term.

1999 - $1,050 taxed at short term, $2,000 at long term.

2000 - Sell for $12,000 - take loss of $2,700.

How much of this loss is short-term and how much long-term? >>

The breakdowns for 1998 and 1998 no longer matter. The only thing that matters is basis, which is the total invested, including reinvested distributions.

A specific number of shares were sold in 2000. Those shares that had been held for more than 1 year are long-term, the rest short-term. The information needed to determine the split hasn't been posted.

Phil Marti
Tax Preparer
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