J.K. Lasser's Your Income Tax 2023, 2nd Edition

CHAPTER 32Tax Rules for Investors in Mutual Funds

32.1	Timing of Your Investment Can Affect Your Taxes	609
32.2	Reinvestment Plans	609
32.3	Mutual Fund Distributions Reported on Form 1099‐DIV	609
32.4	Tax‐Exempt Bond Funds	610
32.5	Fund Expenses	610
32.6	Tax Credits From Mutual Funds	611
32.7	How to Report Mutual Fund Distributions	611
32.8	Redemptions and Exchanges of Fund Shares	611
32.9	Basis of Redeemed Shares	613
32.10	Comparison of Basis Methods	615
32.11	Mutual Funds Compared to Exchange‐Traded Funds	616

As a mutual fund shareholder, you may receive several types of distributions, such as ordinary dividends, capital gain distributions, exempt‐interest dividends, and return of capital distributions. The rules for reporting the different types of distributions are discussed in this chapter.

The tax law provides different methods of identifying the particular shares being sold when you sell a portion of your mutual fund holdings and of determining the cost basis of those shares. You may be able to use these methods to obtain a preferred tax result on the sale.

32.1 Timing of Your Investment Can Affect Your Taxes

You may buy a tax liability if you invest in a mutual fund that has already realized significant capital gains during the year. For example, if a fund is about to make a year‐end capital gain distribution and you invest shortly before that, you will in effect have to pay tax on the return of your recently invested money.

You will ...