Tax Reporting: Capital Gains and Losses
Assets held for investment purposes, including as stocks, options and bonds, are classified by the IRS as capital assets. When such assets are sold, a capital gain or loss is realized on the sale. If the capital asset is sold for a price greater than its purchase price, then a capital gain has been realized; if less, then a capital loss has been realized. In determining whether a capital gain or loss has been realized, adjustments to the purchase and sales price may be allowed to recognize certain transaction costs such as commissions and other specific adjustments.
Proper determination and recognition of capital gain and loss is important as capital gains may be subject to lower tax rates than other forms of income. Net capital losses are subject to annual limits. The taxation of capital gains and losses are also distinguished by the length of time the asset was held prior to sale.
IRS Publication 550, "Investment Income and Expenses" is a good source of information on this topic. It is available free on line at www.IRS.gov/formspubs. We also recommend you consult your tax professional.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Dividends and Distributions: If I own foreign securities in my IRA and there is foreign tax withheld, may I claim a foreign tax credit?
No. Foreign tax credits may not be claimed when generated in nontaxable accounts (IRAs).
Dividends and Distributions: What if the mutual fund I own invested in foreign securities?
If you own a mutual fund that invested in foreign securities, the mutual fund may have paid taxes to a foreign country as a result of owning those securities. Form 1099-DIV reports the gross amount of the dividend and the amount of foreign tax. Refer to IRS Publication 514, Foreign Tax Credit for Individuals and the instructions for Form 1040, Schedule A (Itemized Deductions) and Form 1116, Foreign Tax Credit.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax: Dividends and Distributions: Where are foreign tax withheld amounts reported?
The amount of foreign tax withheld from dividends is reported on Form 1099-DIV. The IRS does not require reporting of foreign tax withheld on gross proceeds and substitute payments in lieu. Refer to IRS Publication 514, Foreign Tax Credit for Individuals and the instructions for Form 1040, Schedule A (Itemized Deductions) and Form 1116, Foreign Tax Credit. Please consult your tax advisor for further guidance.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax Reporting: Foreign Tax Withholding
Foreign taxes are withheld on foreign stocks even though the shares are trades and were purchased on a US stock exchange. They are withheld at the source (company) level and remitted to the foreign government, much like US withholding taxes. US taxpayers may receive a tax credit for these foreign taxes on their US Tax returns. Consult your tax professional and refer to IRS Publication 514 “Foreign Tax Credit for Individuals” for more information on this subject.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax Reporting: Return of Capital (ROC)
Return of Capital (ROC) is a distribution paid to fund shareholders in excess of a fund's current and accumulated earnings and profits. An ROC distribution is generally nontaxable and reduces a shareholder's cost basis in the investment. If an ROC distribution exceeds a shareholder's cost basis, then any additional amount is treated as a capital gain.
Refer to IRS Publication 551, Basis of Assets for further information.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax Reporting: Dividends/Payments in Lieu
Substitute payments, such as dividends on securities that you have loaned to others, are reported in Box 8 on Form 1099-MISC.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax: Dividends and Distributions: Payments in Lieu of Dividends
If Interactive Brokers lends out your stock or securities, you do not receive dividends (or interest), but payments in lieu of dividends (or interest). For example, IBKR “loans” stock for use in a short sale transaction to another account and receives substitute dividend payments on your behalf paid while the short position was open. Because you are not receiving the dividend directly, you receive a payment in lieu. Refer to Publication 550, Investment Income and Expenses, for more information.
Circular 230 Notice: These statements are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor.
Tax: Dividends and Distributions: Reporting Long-Term Capital Gains Distributions from Mutual and Exchange Traded Funds (ETFs)
Long-term capital gain distributions are reported on Form 1099-DIV in Box 2a (total capital gain distributions).
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Tax: Dividends and Distributions: Short-term capital gains distributions from mutual funds and exchange traded fund (ETFs)
Short-term capital gain distributions from mutual funds and exchange traded funds (ETFs) are classified as ordinary dividends and reported on your Form 1099-DIV.
In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
