CapitalGain on 1099 Consolidated (box 2a) can be use to compute the sum of all capital gains/loss (Stocks in the same category) which is limited to a loss of $3000 per year.
Each year, generally in the last couple of months of the year, mutual fund shareholders face the possibility of receiving capital gains distributions from their mutual funds. Don’t be fooled by the capital gains distributions.
When your mutual fund makes a distribution of its investment earnings to you and reports it in box 2a of Form 1099-DIV, the IRS allows you to treat the distribution like a long-term capital gain. This is beneficial since the same tax rules that apply to your qualified dividends also apply to mutual fund capital gain distributions, regardless of whether you hold the investment for 10 days or 10 years.
Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT.
Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT.
1099-DIV
Box 1a of your 1099-DIV will report the total amount of ordinary dividends you receive, while box 1b reports the portion of box 1a that is considered to be qualified dividends.
For ordinary dividends that aren’t qualified, which is equal to box 1a minus 1b, you’ll pay tax at ordinary rates.
As of this writing, qualified dividends are taxed as long-term capital gains. This means that if your highest income tax bracket is 15 percent or less, you receive these dividends tax-free. If your marginal rate of tax is higher than 15 percent, your qualified dividends are taxed at 15 percent.
To be qualified, your dividends must be paid by a U.S. corporation or, if a foreign corporation, a tax treaty must exist between the U.S. and the country of incorporation, or the shares must trade on a U.S. stock exchange. Moreover, at a minimum, you must own the stock for more than 60 days and satisfy additional requirements.
Dividends are taxed either as ordinary income or as qualified dividends. In order to be taxed as a qualified dividend, the investor "must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date," as the IRS explains in Publication 550.
The tax rate on qualified dividends is 0% or 15% (depending on the individual's income tax rate). If the individual has a regular income tax rate of 25% or higher, then the qualified dividend tax rate is 15%. If the individual's income tax rate is less than 25%, then qualified dividends are taxed at the zero percent rate.
Examples of dividends that do not qualify are:
- Dividends paid on money market accounts
- Dividends from mutual funds attributable to interest and short-term capital gains
- Dividends from real estate investment trusts (REITs)
- Dividends received in your IRA
Ordinary dividends are taxed as income within your applicable tax bracket. Qualified dividends, however, are treated as capital gains for tax purposes. Qualified dividends are taxed at either 0%, or 15%. Taxpayers within the 10% and 15% tax brackets do not pay taxes on qualified dividends.
A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. You should receive a Form 1099-DIV or other statement showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3.
A return of capital distribution (IRS terminology refers to these distributions as "nondividend distributions") differ from ordinary dividends in that they are not made out of earnings, but are made out of capital. Mutual funds are one of the business entities which can make a return of capital distribution. When an investment is held in a taxable account, these distributions are, under most circumstances, non-taxable. The distribution reduces the tax basis of the fund. Thus, the distribution is taxed at capital gains tax rates when an investor sells fund shares. If the return of capital distributions are larger than the tax basis of shares, the distribution is taxed as a capital gain.
Example: An investor holds a stock with a $10 basis. The investor receives a $2 return of capital dividend. The $2 dividend is not taxable income. The investor reduces the basis of the stock to $8 dollars. If the investor sells the stock for $10, the $2 profit will be reported as a taxable gain and will be taxed as either a short term or long term gain depending on how long the investor has held the stock.
Nondividend Distributions
A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation. You should receive a Form 1099-DIV or other statement from the corporation showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you do not receive such a statement, you report the distribution as an ordinary dividend.
Basis adjustment. A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered. This nontaxable portion is also called a return of capital. It is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first.
When the basis of your stock has been reduced to zero, report any additional nondividend distribution that you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. See Holding Period in chapter 14.
Example.
You bought stock in 1996 for $100. In 1999, you received a nondividend distribution of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2008. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2008. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years.
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