Tax: Capital Gains and Losses - The Wash Sale Rule
The IRS defines a wash sale as a sale of stock or securities at a loss within 30 days before or after you buy or acquire in a fully taxable trade, or acquire a contract or option to buy, substantially identical stock or securities.
A wash sale occurs if you realize a loss on the sale of the security, and then buy a "substantially identical" replacement stock within the 61-day period, and the loss is deferred until the replacement shares are sold.
Commodity futures contracts are not considered stock or securities and are not covered by the wash sale rule; however, any straddle position acquired after June 23, 1981 is subject to the rule.
For further information on the wash sale rule, refer to IRS Publication 550, Investment Income and Expenses, the instructions to Schedule D (Form 1040), and consult your tax advisor.
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: Single Stock Futures
Transactions involving single stock futures are not required to be reported on Form 1099. Refer to IRS Publication 550, Investment Income and Expenses for further discussion, and consult your tax advisor.
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: Capital Gains and Losses: Mutual Fund Capital Gains Distributions
Mutual fund distributions may be in the form of long-term capital gains or ordinary income distributions (which includes any short-term capital gain).
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.
Capital Gains and Losses: The Difference Between Short-term and Long-term Capital Gains
Short-term capital gains are capital gains earned on the sale of securities and mutual fund shares held for one year or less. If you hold an investment for more than one year, any gain on the sale of the asset is considered long-term and is taxed at a more favorable capital gains tax rate. The date a security is acquired is the trade date +1 and the date of sale is the trade date.
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: 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.
