Series 6 - Unit 7: Investment Taxation

Long-term gains

held for over a year, taxed at a lower rate

Short-term gains

held for less than a year, taxed as ordinary income

How often do mutual funds distribute capital gains to investors?

once a year

Capital loss deduction

if losses > gains, up to 3k can be used to reduce ordinary income. Any extra can be carried forward to future years

"Carry-forward losses"

the amount greater than 3k that is carried forward

do unrealized gains have a tax impact?

no

FIFO

first in first out, when you sell a portion of an investment, the IRS assumes the oldest shares are sold first

Wash Sale

 sell asset at loss, reopen a very similar position within 30 days. Only illegal if used to try to reduce ordinary income

Cost Basis of a gifted security

same as the original owner's cost basis

Cost basis of inherited security

the CMV of the asset at the time of death, or estate can choose alternate date 6 months later

Interest (from debt securities) taxation

ordinary income

Dividend taxation

taxed as ordinary income UNLESS it's a qualified dividend

Qualified Dividends Taxation

taxed at capital gains rate

(2) requirements to be a qualified dividend:

1. Must be a US corp, an ADR, or foreign corp eligible under a tax treaty

2. Stock held for 60 days within a 121 day period that starts 60 days before the ex-dividend rate

Preferred Stock Dividend Taxation

almost always qualified, taxed at capital gains rate

Mutual Fund Taxation (fund level)

subchapter M, taxed as a conduit, meaning they're only taxed on the investment income that they keep

Subchapter M requirements (2)

• Distribute 90% of NII to shareholders

• Must calculate NII as: Net Investment Income (NII) = Dividends + Interest - Expenses

On what form are dividends reported to shareholders?

1099-DIV

Do investors pay tax on reinvested dividends?

yes