Capital Gains FAQs
Refer to www.irs.gov for detailed information on a wide range of tax issues.
A capital gain is the profit that results from selling a capital asset such as a mutual fund share at a price higher than the purchase price. In contrast, a capital loss results from selling a capital asset for a price lower than the purchase price.
In general, investors holding mutual fund shares in taxable accounts may be subject to income taxes as a result of two types of events (as noted above):
Income dividends represent the interest and dividend income the fund received on its portfolio and short-term capital gains the fund earned on securities the fund sold. Capital gains distributions represent the profits a fund makes when it sells portfolio securities held more than 1 year and realizes capital gains. In both cases, the fund typically "passes through" that income or gain to its shareholders in the form of dividends or capital gains distributions.
Distributions of dividends and capital gains by your fund may be subject to income tax regardless of whether you receive them in cash or reinvest them in additional shares.
Even if you held your shares less than a year, a distribution of long-term capital gains by the fund is subject to tax as a long-term capital gain.
If a fund distributes short-term capital gains as part of its ordinary income dividends, they are taxed as ordinary income, not capital gains. They are reported as "dividend income" on your tax return.
I own shares of a municipal bond fund. Can I receive a taxable dividend or capital gain distribution?
Even though municipal bond funds try to earn income that will be exempt from federal income taxes, it is possible that a municipal bond fund might pay taxable ordinary income dividends and taxable capital gains distributions. For example,the fund might have a long-term gain when it sells a municipal bond that has appreciated in value.
In the past, taxable dividends were taxed as ordinary income, at rates as high as 35%. Provisions enacted in 2003 for lower capital gain tax rates and qualified dividends taxed at capital gain rates have been made permanent as part of the American Taxpayer Relief Act of 2012 (P.L. 112-240) (ATRA). Additionally as part of ATRA an additional capital gain rate was added affecting the higher tax brackets (and thereby affecting the qualified dividend tax rates as well). Effective for tax years beginning January 1, 2013, qualified dividends are taxed at capital gain rates depending on your income tax bracket at 20%, 15% or 0%. Also in 2013 an additional Medicare tax of 3.8% applies to net investment income (which may include capital gains regardless of holding period as well as certain dividends) as part of the Patient Protection and Affordable Care Act enacted March 23, 2010.
For the 2012 calendar tax year the qualified dividend tax rate was 15% and 0%. The 20% tax rate and the additional Medicare tax of 3.8% on net investment income were not applicable.
Dividends that are not qualified dividends continue to be taxed at ordinary income rates.
The law allows mutual funds to pass through qualified dividends, but to qualify for the lower tax rates, shareholders must have held shares for more than 60 days during a 120-day period that begins 60 days before the fund's ex-dividend date. Refer to the instructions on Form 1040 for a complete list of non-qualifying dividend exceptions. The amount of qualified dividends paid by your fund will be provided on Form 1099-DIV. If you meet the holding period requirements, you may be eligible for the reduced income tax rates on that dividend.
How will I know how to report dividends, short-term gains and long-term capital gains distributions on my tax return?
In February, the fund will send you a Form 1099 which will identify all the distributions the fund paid to you during the tax year, and will indicate whether they are ordinary income dividends or long-term capital gains distributions.
A return of capital is a distribution by a fund that is not from its earnings or profits. It might occur, for example, if a fund has to re-characterize part of a previously-distributed dividend as a result of losses that the fund incurs after the dividend was paid. A return of capital is non-taxable to the extent of your basis in the shares. You would reduce your basis in the shares by the amount of the distribution. Any return of capital will be separately identified when you receive your tax statements. Any return of capital that exceeds cost basis may be treated as a capital gain. More information can be found in Pub. 550, Investment Income and Expenses at www.irs.gov.
The record date is the date on which a fund determines which shareholders are entitled to a distribution of dividends and/or capital gains. Shareholders "of record"—those who own shares of the fund on the record date—receive the distribution; shareholders who invest after the record date do not.
This refers to the date when a distribution of dividends and/or capital gains is deducted from a mutual fund's assets or set aside for payment to shareholders. On the ex-dividend date, the fund's share price (the net asset value per share) drops by the amount of the distribution (the net asset value may also change on that date because of market activity affecting the value of the fund's portfolio holdings).
On the day that a fund distributes a dividend or capital gains to shareholders, the fund's net asset value per share (for each class of shares) drops by the amount of the dividend or distribution per share, to reflect that the distribution has been paid out. The drop in the net asset value does not reflect a loss in the shareholder's overall investment value, but instead indicates that a portion of that value has been given to the shareholder as a capital gain or income dividend. Keep in mind that there may also be appreciation or depreciation in the fund value from the market activity on that day that will also be reflected in the NAV.
Provisions enacted in 2003 for lower capital gain tax rates and dividends taxed at capital gain rates have been made permanent as part of the American Taxpayer Relief Act of 2012 (P.L. 112-240) (ATRA). Additionally as part of ATRA an additional capital gain rate was added affecting the higher tax brackets. Effective for tax years beginning January 1, 2013, capital gains are taxed depending on your income tax bracket at 20%, 15% or 0%. Also in 2013 an additional Medicare tax of 3.8% applies to net investment income (which may include capital gains regardless of holding period as well as certain dividends) as part of the Patient Protection and Affordable Care Act enacted March 23, 2010.
For the 2012 calendar tax year the capital gain tax rate was 15% and 0%. The 20% tax rate and the additional Medicare tax of 3.8% on net investment income were not applicable.
A mutual fund's capital gain distribution will be taxed at the capital gain rate. It is currently anticipated that all of the estimated capital gain amounts will be subject to the reduced capital gain rates. Capital gains may also be taxed under state capital gains taxes.
For federal income tax purposes, if an investment is held for one year or less, any gain on the sale of the investment is considered short-term and is taxed as ordinary income at your marginal tax rate, which can range from 15% to 39.6% under federal income tax rules. Effective for dispositions made after December 31, 2012 short-term capital gains may be subject to the additional Medicare tax of 3.8% on net investment income.
For federal income tax purposes, if an investment is held for more than one year, any gain on the sale of the investment is considered long-term and is taxed at the capital gains tax rate of either 15% or 5% for dispositions made after May 5, 2003 but before January 1, 2013. Effective for dispositions made after December 31, 2012 there is added a 20% tax rate for higher income tax brackets. Also effective for dispositions made after December 31, 2012, long-term capital gains may be subject to the additional Medicare tax of 3.8% on net investment income.
Under the Internal Revenue Code, the wash sales rules are very complicated. In general, as applied to a mutual fund investment, a "wash sale" is the sale and subsequent repurchase of shares of the same mutual fund within 30 days. The wash-sale period starts 30 days before the share is sold and ends 30 days after that sale. The IRS does not allow investors to use a "wash sale" as a tactic for realizing a capital loss for tax purposes. If the transaction is subject to the wash sale rule, and if there is any loss on the sale (including a difference in value because of the sales charge that was paid), it is not recognized for federal income tax purposes and generally cannot be used to offset capital gains. Investors would have to wait at least 30 days before repurchasing shares in a fund sold for a loss. This could have negative investment effects for your portfolio strategy, depending on market activity.
Many mutual funds try to qualify as a "regulated investment company" under the Internal Revenue Code, so that they can "pass through" their income and gains to shareholders without having to pay taxes at the fund level on the dividends and capital gains they realize. This avoids a "double taxation" on that income - taxation at both the fund and shareholder level. To qualify as a regulated investment company for those purposes, the fund must pay out at least 90% of the income and gains it realizes for its tax year. In addition, to avoid penalty federal excise taxes at the fund level, each calendar year a fund must pay out 98% of its calendar year income and 98% of its capital gains realized through October 31 of each year.
Even if a fund's share price has fallen due to stock market volatility or for other reasons, it is possible that the fund may have realized capital gains on some of the securities it sold during the year (and that the gains exceed capital losses in the portfolio). As a result, to avoid the excise taxes described above, and to comply with the distribution requirements under the Internal Revenue Code to qualify as a "regulated investment company," the fund may have to pay out those gains to shareholders.
Knowing what to save ahead of time to make tax preparation for you (and your accountant) as easy as possible:
There are two main reasons why you may not have received a Form 1099-DIV. The most common reason is that none of your investments paid a dividend or capital gain for the tax year in question. The second, less common, reason is that we do not generate tax forms to report distribution amounts that are less than $10. Remember that a fund's distribution is never guaranteed.
Please keep in mind that any capital gains paid by a fund come from the sale of securities within that fund. If the portfolio manager sells a security and realizes a gain on that investment, the amount of the gain is considered taxable income. Typically, mutual funds will pass this gain, along with any associated tax liabilities, to their shareholders. There are a number of reasons that a fund may not have significant, or any, capital gains for a given year. For example, if a fund does not sell any of its securities during the year, it would not have any capital gains to distribute even if the underlying securities had performed very well. Additionally, if securities sold within the portfolio were worth less than they were at the time of purchase, the fund realizes a loss on that investment, and there is nothing to distribute. Most of the time a fund will realize both gains and losses on various securities sold throughout the year. If there is a net gain, that amount will usually be distributed amongst the funds' shareholders.
For more information regarding Form 1099-DIV and other tax related matters, visit our Tax Center. If any tax forms were generated for your account(s), you may access them online by selecting "My Accounts" from the "Accounts & Services" tab at the top of the screen, logging in to your account(s), and then selecting the "Documents" tab.
Saving these documents will help you keep track of important information like your dividend reinvestments, IRA and other retirement plan contributions.
Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.
Before investing in any of the Oppenheimer funds, investors should carefully consider a fund's investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com, or calling 1.800.CALL OPP (225.5677). Read prospectuses and summary prospectuses carefully before investing.
Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc.
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