A capital gain is the difference between the purchase price and the selling price of an asset (i.e., stocks, bonds, and mutual fund shares) which results in a profit. For example, if a stock for $100 is purchased and later sold for $120, the capital gain is $20. A capital loss results from selling an asset at a lower price than the purchase price.
When a mutual fund realizes more gains than losses, mutual funds are generally required by law to distribute the net gains to shareholders by calendar year end. These distributions, which typically occur quarterly, semi-annually or annually, are made in order to satisfy such requirements.
These distributions are taxable to shareholders, unless the mutual funds are held in a 401(k) plan, IRA, 403(b) account or other tax deferred accounts. Investors in tax deferred products will not have tax consequences as a result of these distributions. Also, some distributions are specifically exempt from taxes — for example, income from municipal bond funds is typically exempt from federal taxes.
Short-term capital gains result from the sale of an investment held for less than a year. A distribution of short-term gains by a mutual fund is taxed as ordinary income.
Long-term capital gains result from the sale of an investment held for more than a year. A distribution of long-term gains by a mutual fund is taxed at the investor's capital gains tax rate.
Investors are required to include these amounts on their federal income tax return for the year when they are received.
"Buying a dividend" refers to purchasing a mutual fund just prior to a distribution by that fund. If the fund is held in a taxable account, this generates an unnecessary tax bill. In essence, a portion of the investment is returned to the investor as a taxable distribution.
A mutual fund's cost basis is the cost of fund shares (determined by various means) used to help shareholders calculate the taxable gain or loss of their investment if they redeem their shares. For BlackRock funds held at the transfer agent, this information is included in our Quarterly Statements when available.
To learn more about dividend dates and distribution amounts, visit the Tax Information page. For fund specific distributions, visit our mutual funds homepage and then select a fund to review its profile and view its distributions.
Yes, mutual fund distributions are considered taxable income, and shareholders must pay taxes on their gains even if they reinvest them into the mutual fund for more shares.
BlackRock manages our mutual funds consistent with their investment objectives. Though we are mindful of the tax implication of capital gains on our shareholders, investment decisions take into account other factors as well and are based upon prudent portfolio management in accordance with the each fund's investment strategy.
The Record Date is the date used to determine which shareholders are entitled to a given distribution; shareholders of record as of that date receive the distribution.
The Ex-date is the next date after record date on which the net asset value (NAV) drops by the amount of the distribution. Those shareholders who reinvest their distributions receive additional shares.
The Payable Date is the date that payments are sent to shareholders who do not reinvest their distributions. Those shareholders who reinvest their distributions receive additional shares.
Even if a mutual fund's NAV has fallen during the year, it is still possible that securities sold by the mutual fund within the year resulted in a capital gain. For example, a security bought three years ago at $10 that appreciated and was sold this year at $20 will realize a $10 capital gain.
When profits from sales of securities exceed losses, they accumulate and contribute to the rise of the net asset value (NAV) of the fund. Since a portion of the NAV is being deducted and distributed to the shareholders, the NAV will drop by the distribution amount. For example, a fund's shares sell at a NAV of $10. If sales of the fund's securities have realized a profit of $2 a share during the year, a capital gain distribution of $2 will be deducted from the NAV on a specified date and on that date the fund share price will decline to $8.
This drop in NAV does not reflect a loss since the portion deducted from NAV is passed through to shareholders. Distributions do not impact a mutual fund's total return as they are taken into account as part of a fund performance.
Please keep in mind that the NAV will also reflect market activity. Distributions do not impact a mutual fund's total return.
A Form 1099-DIV is sent to shareholders by investment fund companies to provide a record of all taxable capital gains and dividends paid, including those that have been re-invested in a given tax year. Tax Form 1099-B will also be sent if a shareholder has redeemed shares from their BlackRock mutual fund. Form 1099-INT is sent to shareholders who have received dividend distributions on municipal bond funds.
Your Form 1099-DIV lists all federally taxable dividend and capital gain distributions (short-term and long-term) of $10 or more paid to your mutual fund accounts.
The IRS does not require tax reporting on any taxable amounts less than $10 for a calendar year. A shareholder who did have a taxable event during the year worth more than $10 and did not receive a 1099 can contact BlackRock shareholder services at 800-441-7762 between the hours of 8 a.m. and 6 p.m. (ET), Monday through Friday.
For more information on BlackRock Funds, please contact BlackRock shareholder services at 800-441-7762.
You can find tax information by going to our dedicated Tax Information page or within the mutual funds or closed-end product pages.
If you have one of the following types of accounts, you will not receive Form 1099-DIV: Individual Retirement Accounts and other tax-deferred accounts (including Roth and Traditional IRAs, Rollover IRAs, SEP and SIMPLE IRAs, Coverdell Education Savings Accounts, and qualified tuition plan accounts), pension, 403(b), profit sharing and money purchase plans, accounts owned by corporations, documented nonresident aliens and certain tax-exempt organizations.
Form 1099-B reports the gross proceeds from the sale or exchange of your mutual fund shares (non-retirement), except money market accounts and contingent deferred sales charge deducted from the gross proceeds of the transaction.
Form 1099-R reports both full and partial distributions from your mutual fund retirement plan accounts, with the exception of retirement accounts held by other custodians.
If you withdrew assets from your retirement plan account, took your retirement account dividend distributions in cash (unless reinvested into your retirement account), or converted your traditional IRA to a Roth IRA.
If you arranged to move your IRA account as a trustee-to-trustee transfer of assets directly to another IRA account without taking possession of the funds
Form 5498 reports all contributions to IRA accounts for the current tax year. The information is reported to the IRS, but you don't have to file it with your tax return.
You can obtain Form W-9 online at www.irs.gov or by calling your Investment Program’s toll-free telephone number shown on your tax forms.
As a financial expert with a comprehensive understanding of investment topics, let's delve into the concepts mentioned in the provided article.
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Capital Gain and Capital Loss:
- A capital gain is the profit made from the difference between the purchase price and selling price of an asset.
- A capital loss occurs when an asset is sold at a lower price than the purchase price.
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Mutual Fund Distributions:
- Mutual funds are required by law to distribute net gains to shareholders by year-end.
- These distributions are taxable to shareholders unless the funds are held in tax-deferred accounts like 401(k), IRA, or 403(b).
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Short-term and Long-term Capital Gains:
- Short-term gains result from selling an investment held for less than a year and are taxed as ordinary income.
- Long-term gains result from selling an investment held for more than a year and are taxed at the investor's capital gains tax rate.
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Buying a Dividend:
- Refers to purchasing a mutual fund just before a distribution, potentially leading to unnecessary tax implications.
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Cost Basis of Mutual Funds:
- The cost basis is the cost of fund shares used to calculate the taxable gain or loss when redeeming shares.
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Record Date, Ex-date, and Payable Date:
- Record Date determines shareholders entitled to a distribution.
- Ex-date is when the NAV drops by the distribution amount, and reinvestors receive additional shares.
- Payable Date is when payments are sent to shareholders who do not reinvest.
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Impact on Net Asset Value (NAV):
- Even if NAV falls during the year, securities sold at a gain can contribute to the rise of NAV.
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Form 1099-DIV and Other Tax Forms:
- Form 1099-DIV provides a record of taxable capital gains and dividends paid, including reinvested amounts.
- Form 1099-B reports gross proceeds from the sale or exchange of mutual fund shares.
- Form 1099-R reports distributions from retirement plan accounts.
- Form 5498 reports contributions to IRA accounts.
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Tax Information and Reporting:
- Investors are required to include distribution amounts on their federal income tax return.
- Tax reporting is necessary for taxable events exceeding $10, and shareholders receive various forms based on their investment accounts.
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Forms for Different Accounts:
- Different forms are used for various accounts, such as Form 1099-DIV for taxable accounts and Form 5498 for reporting IRA contributions.
Understanding these concepts is crucial for investors to navigate the tax implications and make informed decisions regarding their investments. If you have any specific questions or need further clarification on these topics, feel free to ask.
