"Andrew" <andrew[at]losset.net> wrote:
- quote -

Suppose you buy the mutual fund the day before it declares
the gain. The next day it declares the gain. The value of
what you own is the same, but suddenly you owe taxes on it.
You're paying income or capital gains taxes even though you
did not receive any income or increase in value. The term
for buying a fund right before it makes a distribution is
"buying a dividend".

Compare that with owning a fund for the whole year before it
makes the distribution. In this case, if its holdings
increased in value during the year, so did the NAV. When it
distributes the gain, much of this is gain that you actually
saw in your holding. So you end up paying taxes on
something you actually received.

It's still somewhat of a big deal, but not as bad as buying
a distribution. Your paper gains are turned into income or
realized gains when the fund distributes them, so you can't
put off paying taxes. And in the case of capital gain
distributions, they may include gains that had been
accumulating in the fund for years before you purchased the
shares.

--
Barry Margolin, barmar[at]alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***

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"Andrew" <andrew[at]losset.net> writes:

- quote -

The big deal is that you get taxable income but no
economic gain.

Assume you buy 1,000sh of a fund at $20/sh. Total
value is $20,000. The very next day the fund declares
a $2/sh distribution and the NAV drops to $18/sh because
of it.

If you don't reinvest distributions, you have
$18,000 ($18 x 1000sh) of fund + $2,000 cash = $20,000

If you do reinvest distributions, you have
$20,000 ($18 x 1111.111sh) of fund/

Either way you have $2,000 ($2 x 1000sh) of taxable
income (and a $2,000 unrealized capital loss).

If you had waited one more day to buy the fund,
you'd be in the same economic position but would
have escaped $2,000 of taxable income.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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Barry Margolin wrote:

- quote -

Barry - dumb question I've wondered about for a while. If
the NAV is reduced by the amount of the capital gain (which
is true), so what's the big deal about receiving them if the
value of what you own after the distribution is the same?
Or is that true?

Regards

Andrew

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"chrisexv6" <charry[at]gmail.com> wrote:

- quote -

+ reinvested capital gains

- quote -

The fund reduced the NAV at the time they made the
distributions, so the capital gain at sale time has already
been reduced, and that avoids the double taxation.

- quote -

Correct.

--
Barry Margolin, barmar[at]alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***

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"chrisexv6" <charry[at]gmail.com> wrote:

- quote -

all reinvested dividends (including capital gain divs) are
added to cost basis

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] > > -----> real address on hobokeni or hobokenx <-----

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"chrisexv6" <charry[at]gmail.com> writes:

- quote -

Cap gain distributions only get get subtracted (in your
equation above) if they are reinvested.

The whole total basis thing is actually very simple:
(1) *All* purchases increase basis by the amount
of the purchase.
(2) *All* reinvestments increase basis by the amount
of the distribution, regardless of what type
of distribution (dividend, capital gain, return
of capital, whatever).
(3) Return of capital distributions *reduce* basis by the
amount of the distribution, whether or not they are
reinvested (of course, if they are reinvested, that
reinvestment increases basis back -- see (2) above).

And (1) and (2) really could be collapsed together
into (1), since all a reinvestment is, is a shortcut
to save the fund mailing you a check and you signing
the check over to them and mailing it right back to
buy more shares.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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chrisexv6 <charry[at]gmail.com> wrote:

- quote -

If the capital gains were paid to you in cash, they don't
affect the basis at all. If they were reinvested into the
funds, the amount reinvested is part of the basis.

That is, they're treated exactly like dividends for this
purpose (the only difference being the tax rate).

Seth

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"chrisexv6" <cha...[at]gmail.com> wrote:

- quote -

Reinvested capital gains distributions also are included
in your basis calculation. So the correct formula is

taxable amount from sale = sale price - (original investment
+ reinvested dividends + reinvested capital gains distributions)

If anything was not reinvested, it is not included in the
above calculation.

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chrisexv6 wrote:

- quote -

snip

- quote -

See change in your equation. For your situation, the
reinvested Cap Gains and Reinvested Dividends are no
different, and also no different than if you added small
sums to the funds, quarterly, or annually. When distributed,
you got cash, paid tax, whether cap gain or dividend, and in
your case you used the money to buy more shares.

So long as you tracked those new purchases, you have all you
need to calculate your basis.

Joe
JoeTaxpayer.com

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charry[at]gmail.com (chrisexv6) posted:

- quote -

Actually, the equation might better read: Proceeds - Cost
basis = net taxable gain. (The "cost basis" computation is
what you're concerned about -- and it should properly
include _all_ reinvested funds.)

- quote -

In general, your logic is correct; however, you should
carefully check statements for previous years (undoubtedly
available from the mutual funds involved), or simply phone
the customer service number to determine whether CGD
(Capital Gains Distributions) were _reinvested_ for your
wife's holdings.

The most common practice [for mutual funds where
reinvestment is requested] is that the mutual fund will
reinvest _all_ dividends and distributions. So, if you
don't verify this, you might be _understating_ your wife's
cost basis ... which would cause her/you [if MFJ] to pay
unnecessary extra taxes.

Bill

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I see there are a TON of cost basis questions on this group,
but I couldnt quite get the answer I needed.

My wife has funds that she's held for a long time (15 years
or so). I *know* the dividends were reinvested, but she's
also had capital gains distributions reported for several of
those years. Not being a tax pro, it looks to me like the
capital gain distribs were listed as part of her gross
income on the 1040.

She has now sold 3 of the funds, and we're trying to
determine the cost basis (to get an idea of the tax
implications). My (almost complete) understanding is the
following:

taxable amount from sale = sale price - (original investment
+ reinvested dividends)

My question is where the capital gain distribs fall into
place. It makes sense (to me, anyway) that they would be
another amount subtracted from the above calculation,
because they've already had taxes paid on them, thereby
reducing the taxable "profit" from the sale of the funds
(profit in quotes because Im assuming she ended up making
$$$).

Is my logic correct (provided the capital gains distribs
WERENT reinvested every year)?

If they WERE reinvested, I assume they are then rolled into
the "reinvested dividends" number in the above calculation?

Thanks in advance

-Chris

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