Publication 564 - Mutual Fund Distributions - Internal Revenue Service

Capital loss carryover. If you have a total net

distributions (or had to report undistributed capi-

If you are reporting capital gain distributions

tal gains) on mutual fund shares that you held for

on Form 1040, but are not required to file Sched-

loss on Schedule D (Form 1040), line 16, that is

6 months or less and sold at a loss, report only

ule D (Form 1040), use the Qualified Dividends

more than the yearly limit on capital loss deduc-

and Capital Gain Tax Worksheet in the Form

the part of the loss that is more than the capital

tions, you can carry over the unused part to next

1040 instructions to figure your tax. See

How To

gain distribution (or undistributed capital gain)

year and treat it as if you had incurred it in that

as a short-term capital loss. The rest of the loss

Report, earlier, to see whether you must file

next year. To determine your capital loss carry-

Schedule D (Form 1040).

is reported as a long-term capital loss.

over, subtract from your total net loss the lesser

of:

If you are required to file Schedule D (Form

Example. On April 10, 2009, you bought a

1040), use the Qualified Dividends and Capital

1. Your allowable capital loss deduction for

mutual fund share for $20. On June 26, 2009,

Gain Tax Worksheet in the Form 1040 instruc-

the year, or

the mutual fund paid a capital gain distribution of

tions to figure your tax if both of the following are

$2 a share, which is taxed as a long-term capital

true.

2. Your taxable income increased by your al-

gain. On July 14, 2009, you sold the share for

lowable capital loss deduction for the year

1. You have a net capital gain or qualified

$17.50. If it were not for the capital gain distribu-

and by your deduction for personal exemp-

dividends (or both). You have a net capital

tion, your loss would be a short-term loss of

tions.

gain if both lines 15 and 16 of Schedule D

$2.50 ($20 − $17.50). However, the part of the

If your deductions exceed your gross in-

(Form 1040) are gains.

Qualified dividends

loss that is not more than the capital gain distri-

come, you start the computation in (2) above

are explained earlier under

Tax Treatment

bution ($2) must be reported as a long-term

with negative taxable income.

Distributions.

capital loss. The remaining $0.50 of the loss can

be reported as a short-term capital loss.

Use the Capital Loss Carryover Worksheet

2. You do not have to use the Schedule D

in Publication 550 to figure your capital loss

Tax Worksheet.

Loss on share that paid qualified dividends.

carryover.

Any loss on the sale or exchange of a mutual

If you have any collectibles gain, exclusion

When carried over, the loss will keep its

fund share must be treated as a long-term capi-

from eligible gain on qualified small business

original character as long term or short term.

tal loss to the extent you received, from that

stock, or unrecaptured section 1250 gain, you

Therefore, a long-term capital loss carried over

share, qualified dividends

(defined

earlier) that

will have to use the Schedule D Tax Worksheet

from a previous year will offset long-term gains

are extraordinary dividends. This is true regard-

in the Schedule D instructions to figure your tax.

of the current year before it offsets short-term

less of how long you actually held the share.

gains of the current year. For more information

Generally, an extraordinary dividend is a divi-

on figuring capital loss carryovers, see Publica-

Capital Gain Tax Rates

dend that equals or exceeds 10% (5% in the

tion 550.

case of preferred stock) of your adjusted basis in

The tax rates that apply to a net capital gain are

Separate returns. Capital loss carryovers

the mutual fund share.

generally lower than the tax rates that apply to

from separate returns are combined if you now

other income. These lower rates are called the

file a joint return. However, if you once filed

How To Figure Net Gain or Loss

maximum capital gain rates.

jointly and are now filing separately, a capital

loss carryover from the joint return can be de-

The term “net capital gain” means the

Separate your short-term gains and losses from

ducted only on the separate return of the spouse

amount by which your net long-term capital gain

your long-term gains and losses on all the mu-

who actually had the loss.

for the year is more than any net short-term

tual fund shares and other capital assets you

capital loss.

disposed of during the year. Then determine

The maximum capital gain rate can be 0%,

your net short-term gain or loss and your net

15%, 25%, or 28%. See Table 4.

Investment Expenses

long-term gain or loss.

If you figure your tax using the maxi-

Net short-term capital gain or loss. Net

TIP

mum capital gain rate and the regular

You can generally deduct the expenses of pro-

tax computation results in a lower tax,

short-term capital gain or loss is determined by

ducing taxable investment income. These in-

the regular tax computation applies.

adding the gains and losses shown on Schedule

clude expenses for investment counseling and

D (Form 1040), Part I, column (f), lines 1 through

advice, legal and accounting fees, and invest-

6. Line 7 is the net short-term capital gain or

Example. You have a capital gain distribu-

ment newsletters. These expenses are deducti-

loss.

tion that is a section 1202 gain, so the maximum

ble as miscellaneous itemized deductions to the

capital gain rate on the distribution would be

extent that they exceed 2% of your adjusted

Net long-term capital gain or loss. Net

28%. Because you are single and your taxable

gross income. See chapter 3 in Publication 550

long-term capital gain or loss is determined by

income is $25,000, none of your taxable income

for more information.

adding the gains and losses shown on Schedule

will be taxed above the 15% rate. The 28% rate

Interest paid on money to buy or carry invest-

D (Form 1040), Part II, column (f), lines 8

does not apply.

ment property is also deductible, but the deduc-

through 14. Line 15 is the net long-term capital

tion may be limited. See

Limit on Investment

gain or loss.

Interest

Expense, later.

Limit on Capital Loss Deduction

Your net long-term capital gain or loss in-

cludes any undistributed capital gains you re-

Publicly offered mutual funds. Most mutual

If Schedule D (Form 1040), Part III, line 16,

ported on Schedule D (Form 1040), line 11, and

funds are publicly offered. Expenses of publicly

shows a loss, your allowable capital loss deduc-

any capital gain distributions you reported on

offered mutual funds are not treated as miscella-

tion is the smaller of:

Schedule D (Form 1040), line 13.

neous itemized deductions. This is because

1. $3,000 ($1,500 if you are married and filing

these mutual funds report only the net amount of

Total net gain or loss. The total net gain or

a separate return), or

investment income after your share of the in-

loss is determined by combining the net

vestment expenses has been deducted.

short-term capital gain or loss on line 7 with the

2. Your total net loss shown on Schedule D

net long-term capital gain or loss on line 15.

(Form 1040), line 16.

Nonpublicly offered mutual funds. If you

Enter the result on Schedule D (Form 1040),

Enter your allowable loss on Form 1040, line 13.

Part III, line 16. If line 16 shows a gain, enter the

own shares in a nonpublicly offered mutual fund

amount on Form 1040, line 13. If line 16 shows a

during the year, you can deduct your share of

Example. Bob and Gloria sold all of their

loss, see

Limit on Capital Loss

Deduction, later.

the investment expenses on your Schedule A

shares in a mutual fund. The sale resulted in a

(Form 1040). Claim them as a miscellaneous

capital loss of $7,000. They had no other capital

itemized deduction to the extent your miscella-

transactions. Their taxable income was

Figuring Your Tax

neous itemized deductions exceed 2% of your

$26,000. On their joint 2009 return, they can

adjusted gross income. Your share of the ex-

deduct $3,000. The unused part of the loss,

If you are reporting capital gain distributions on

penses will be shown in box 5 of Form

$4,000 ($7,000 – $3,000), can be carried over

Form 1040A, use the Qualified Dividends and

1099-DIV. A nonpublicly offered mutual fund is

to 2010.

Capital Gain Tax Worksheet in the Form 1040A

one that:

instructions to figure your tax. See

How To Re-

If Bob and Gloria’s capital loss had been

port, earlier, to see whether you can report your

$2,000, their capital loss deduction would have

1. Is not continuously offered pursuant to a

capital gain distributions on Form 1040A.

been $2,000. They would have no carryover.

public offering,

Publication 564 (2009)

Page 9

Publication 564 - Mutual Fund Distributions - Internal Revenue Service - 2009 Page 9

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