Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

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Helium
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Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by Helium »

Just wanted to check. Dividends are taxed as normal income, while forced capital gains distributions are taxed at LTCG tax rates, at least for shares you've owned over a year. Is this correct?
Affable at 50
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by Affable at 50 »

Helium wrote: Mon Jan 24, 2022 3:10 am Just wanted to check. Dividends are taxed as normal income, while forced capital gains distributions are taxed at LTCG tax rates, at least for shares you've owned over a year. Is this correct?
What type of securities are you referring to? You will get more complete and relevant answers if you are more precise.

While many dividends are taxed as ordinary income, dividends for stocks, and certain types of mutual funds, and ETS will count as qualified dividends that are taxed at capital gains rates as long as the shares are held long enough, typically 61 days. Exceptions may apply.

Capital gain distributions for mutual funds can be long term or short term, depending on how long the fund held the shares that generated the capital gains. The investor’s holding period is not considered.
livesoft
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by livesoft »

Helium wrote: Mon Jan 24, 2022 3:10 am Just wanted to check. Dividends are taxed as normal income, while forced capital gains distributions are taxed at LTCG tax rates, at least for shares you've owned over a year. Is this correct?
As exactly written above, what you wrote is not quite completely true.
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Geologist
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by Geologist »

If it is a mutual fund, at least for Vanguard, some of this is described in the prospectus. I am also not sure what you mean by "forced capital gains distributions". If a fund (or ETF) makes a capital gains distribution, it is forced exactly as much as a dividend distribution.
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happysteward
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by happysteward »

Here is a nice summary from Fidelity, hope it is helpful…

Image
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rkhusky
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by rkhusky »

Affable at 50 wrote: Mon Jan 24, 2022 3:44 am Capital gain distributions for mutual funds can be long term or short term, depending on how long the fund held the shares that generated the capital gains. The investor’s holding period is not considered.
+1
I had a small short term CG distribution this year in my taxable account. However, the instructions for Schedule D say:
Distributions of net realized short-term capital gains aren't treated as capital gains. Instead, they are included on Form 1099-DIV as ordinary dividends.
So, you won't see STCG distributions listed on your 1099-DIV. They are included with the dividends in box 1. CG distributions in box 2a are only LTCG.

I note that Vanguard provides a document (FASUSGO_012022.pdf) that lists the percentage of income due to US Government obligations for a variety of their mutual funds. Do you multiply this percentage by the amount in box 1 of your 1099-DIV. Or do you have to remove the STCG's first, so that you are multiplying by only the amount of the true dividends?

Edit: Just found this note in FASUSGO_012022.pdf:
The percentages provided apply only to income distributions (dividends); they don’t apply to capital gains distributions (whether long-term or short-term).
So, you need to subtract out the STCG first before multiplying. And it appears that you need to look on the Vanguard website for the STCG info since it's not provided on the tax forms (the year end statement includes the STCG distributions).
Topic Author
Helium
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by Helium »

Sorry everyone, I mean specifically the ST and LT cap gains on 12/28 here: https://investor.vanguard.com/mutual-fu ... ions/vforx

These are taxed at capital gains tax rates?

Are the ST portion of it taxed as ordinary income?
jebmke
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by jebmke »

ST is ordinary income; it will be included in Ordinary Dividends on the 1099-DIV.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
dbr
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by dbr »

That write-up from Fidelity should clarify,

An exercise would be to go through a tax return by hand making up amounts in each of those categories and seeing how they go through a tax return.

A starting point is the Dividends and Capital Gains worksheet with some nuances such as short term capital gain distributions not entering the tax return as capital gain but as ordinary income.
livesoft
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by livesoft »

Helium wrote: Mon Jan 24, 2022 8:38 am Sorry everyone, I mean specifically the ST and LT cap gains on 12/28 here: https://investor.vanguard.com/mutual-fu ... ions/vforx

These are taxed at capital gains tax rates?

Are the ST portion of it taxed as ordinary income?
Dividends may be divided into qualified ordinary dividends and non-qualified ordinary dividends. The link you gave does not make this distinction. The qualified ordinary dividends are taxed at a different rate than the non-qualified ordinary dividends under many circumstances.
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cas
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by cas »

Helium wrote: Mon Jan 24, 2022 3:10 am [...] while forced capital gains distributions are taxed at LTCG tax rates, at least for shares ***you've owned*** over a year. [. . .]
(emphasis added by cas)

Just for clarification, since it is possibly part of the confusion: The short-term/long-term classification (on your 1099-DIV) of capital gain *distributions* (CGD) isn't related to how long *you* owned *your* shares.

CGD result when the manager of the mutual fund sells shares of assets held within the portfolio of the mutual fund. Any annual net gains resulting from this selling activity has to be passed through to the owners of shares of the mutual fund. These capital gain *distributions* are classified as short-term or long-term depending on how long *the fund* owned the particular shares of the particular assets that the manager decided to sell.

(This is in contrast to the "capital gains" that you realize when *you* sell *your* shares of the mutual fund, where the ST/LT classification is dependent on how long *you* owned *your* shares. These will be reported to you on a 1099-B.)

So you can get a 1099-DIV that includes short-term CGD (in the ordinary dividend column) even if you have owned all *your* shares of the mutual fund for many, many years. And you can get a 1099-DIV that shows long-term CGD even if you bought all your shares of the mutual fund a week before the distribution.
iamblessed
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by iamblessed »

It is all taxed the same no matter if you sell it or they sell it depending if it is short or long term. The only thing is you have control over what you sell. You have no control over what they sell.
Last edited by iamblessed on Mon Jan 24, 2022 1:27 pm, edited 2 times in total.
dbr
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by dbr »

Another helpful exercise might be to see what is reported on a 1099-INT, a 1099-DIV, and a 1099-B (or even a 1099-R) and where all that goes in the tax return.

Scroll down here to see all the kinds of 1099's there are: https://www.tax1099.com/1099-forms?mscl ... Tax%201099
Topic Author
Helium
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by Helium »

cas wrote: Mon Jan 24, 2022 8:56 am
Helium wrote: Mon Jan 24, 2022 3:10 am [...] while forced capital gains distributions are taxed at LTCG tax rates, at least for shares ***you've owned*** over a year. [. . .]
(emphasis added by cas)

Just for clarification, since it is possibly part of the confusion: The short-term/long-term classification (on your 1099-DIV) of capital gain *distributions* (CGD) isn't related to how long *you* owned *your* shares.

CGD result when the manager of the mutual fund sells shares of assets held within the portfolio of the mutual fund. Any annual net gains resulting from this selling activity has to be passed through to the owners of shares of the mutual fund. These capital gain *distributions* are classified as short-term or long-term depending on how long *the fund* owned the particular shares of the particular assets that the manager decided to sell.

(This is in contrast to the "capital gains" that you realize when *you* sell *your* shares of the mutual fund, where the ST/LT classification is dependent on how long *you* owned *your* shares. These will be reported to you on a 1099-B.)

So you can get a 1099-DIV that includes short-term CGD (in the ordinary dividend column) even if you have owned all *your* shares of the mutual fund for many, many years. And you can get a 1099-DIV that shows long-term CGD even if you bought all your shares of the mutual fund a week before the distribution.
So for the line in https://investor.vanguard.com/mutual-fu ... ions/vforx that says it's a short term distribution, ALL investors of the fund are taxed as ST right?
jebmke
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by jebmke »

^^ yes. All investors would report ST CG distributions as ordinary dividends. Whether it is taxed the same depends on the total tax return.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
cas
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by cas »

Helium wrote: Tue Jan 25, 2022 4:07 am So for the line in https://investor.vanguard.com/mutual-fu ... ions/vforx that says it's a short term distribution, ALL investors of the fund are taxed as ST right?
Yes. All investors get the same ST cap gain distribution per share of the fund that they own on the record date, regardless of how long they personally have owned that share. The ST CGD will be taxed the same way as a non-qualified ordinary dividend.

(That last sentence is there because I'm sure it is possible to get in a semantics argument about what "taxed as ST" means. ST cap gain *distributions* are reported to you as one component of the "ordinary dividends" column of the 1099-DIV, so they ended up treated on your tax return as non-qualified ordinary dividends. This means that, unlike short term capital gains reported on a 1099-B because *you* sold *your* shares before you held them for a full year, you don't have the opportunity to net them out against any short term capital losses reported by you on Schedule D.)
RubyTuesday
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by RubyTuesday »

livesoft wrote: Mon Jan 24, 2022 8:47 am
Helium wrote: Mon Jan 24, 2022 8:38 am Sorry everyone, I mean specifically the ST and LT cap gains on 12/28 here: https://investor.vanguard.com/mutual-fu ... ions/vforx

These are taxed at capital gains tax rates?

Are the ST portion of it taxed as ordinary income?
Dividends may be divided into qualified ordinary dividends and non-qualified ordinary dividends. The link you gave does not make this distinction. The qualified ordinary dividends are taxed at a different rate than the non-qualified ordinary dividends under many circumstances.
Yes, and the Fidelity writeup muddled this issue as well.

Seems many don’t understand that both qualified and non-qualified ordinary dividends are ordinary dividends. I wish they would just acknowledge the fact that practically everyone refuses to accept the proper terminology and call them broadly dividends that are mutually exclusively qualified or ordinary.
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dbr
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by dbr »

So the question would be what is an example of a not-ordinary dividend? I suppose a possible candidate would be a return of capital. Possibly a tax exempt dividend. Others?
jebmke
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by jebmke »

dbr wrote: Tue Jan 25, 2022 9:38 am So the question would be what is an example of a not-ordinary dividend? I suppose a possible candidate would be a return of capital. Possibly a tax exempt dividend. Others?
return of capital would normally be classified as a non-dividend distribution on the 1099. the 1099-DIV has a separate box for 199A dividends but those are included in Box 1a [as is Box 2e dividends]. Exempt interest dividends are not included in 1a.

The definitive answer to questions like this can usually be found in payer instructions (e.g., in this case, "1099-DIV Instructions." These tell the payers exactly what to include in each box on the form. The 1099-R instructions and W-2 instructions can be very helpful for a tax preparer who sees something unexpected on taxpayer forms.

https://www.irs.gov/instructions/i1099d ... 1000278742
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
RubyTuesday
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by RubyTuesday »

dbr wrote: Tue Jan 25, 2022 9:38 am So the question would be what is an example of a not-ordinary dividend? I suppose a possible candidate would be a return of capital. Possibly a tax exempt dividend. Others?
Even the IRS uses confusing language…

Topic No. 404 Dividends
Dividends are the most common type of distribution from a corporation. They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
My emphasis added. And I just wrote that qualified dividends are ordinary dividends. Who is correct?
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jebmke
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Re: Are dividends and "capital gains distributions" (not manually sold shares) taxed differently?

Post by jebmke »

RubyTuesday wrote: Tue Jan 25, 2022 10:00 am My emphasis added. And I just wrote that qualified dividends are ordinary dividends. Who is correct?
Both, I think. If you follow the arithmetic on the actual tax calculation, I believe the tax is calculated both ways and you pay the lower amount (as applied against total income). I'd have to go back to the Dividend and Capital Gain Tax worksheet and follow the bouncing ball through the calculation. It is simple arithmetic but there are a lot of "lower than" statements so you really have to pay attention.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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