Capital gains from the sale of securities within a mutual fund portfolio are passed on to shareholders in the form of capital gains distributions. These distributions are taxed differently depending on the length of time an individual security is held before a fund sells it. Any gain derived by a mutual fund from the sale of a security held for 12 months or less is considered to be a "short-term" capital gain, and is taxed as ordinary income to the shareholder. Short-term capital gains are combined with any dividend income you may have earned and reported as "Total ordinary dividends" in box 1a on Form 1099-DIV.
For federal income tax purposes, if the security is held by a mutual fund longer than 12 months before it is sold, the capital gain is considered to be "long-term." Distributions of long-term capital gains by a mutual fund are taxed as "long-term" capital gains no matter how long you have owned your shares in the mutual fund.*
Below is an outline of the capital gains tax categories and instructions on how to use the information reported on your Form 1099-DIV.
How to complete tax forms for capital gains and qualified dividends
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Capital gains tax category
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Where reported on Form 1099-DIV
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Where to report on IRS form(s)
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Short-term gains
Individual securities held for 12 or less months. Taxed as ordinary income.
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Box 1a
Total ordinary dividends
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"Ordinary dividends" line 3b on Form 1040. Also on line 5 of Schedule B (Form 1040).
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Box 1b
Qualified dividends*
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"Qualified dividends" line on line 3a of Form 1040. Also complete Schedule D, Line 20, and the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040.
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Long-term gains
Individual securities held for more than 12 months.**
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Box 2a
Total capital gain distributions
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If you are required to complete Schedule D (Form 1040), report the entire amount in Part II, line 13, of Schedule D on Form 1040 in accordance with the instructions for that form.
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* A portion of income dividends designated and paid by a mutual fund as qualified dividend income may be eligible for taxation at long-term capital gain rate, provided certain holding period requirements are met. This is the portion of the amount in box 1a that may be eligible for the 0%, 15%, or 20% capital gains rates. See Form 1040 instructions for how to determine this amount. An additional 3.8% Medicare tax may be imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a mutual fund) to the extent the recipient’s gross income exceeds a threshold amount.
** Long-term capital gains generally are taxed at rates of 0%, 15%, or 20% depending on your income bracket. An additional 3.8% Medicare tax may be imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a mutual fund) to the extent the recipient’s gross income exceeds a threshold amount.