ME1963,
In my own portfolio, I have received capital gains distributions from such state tax exempt funds and had to pay tax on them. Fidelity investments discusses this at
and states that only the interest income from a state-specific bond fund would qualify for tax exemption. Did you receive a 1099-DIV showing capital gains?
Thank you . I read the Fidelity memo. I did receive a 1099-div showing cap gains from NJ LT Tax Exempt Fund. Though I did not sell, the gain is a result of the fund manager buying and selling.
Doesn't the memo refer the reader to the tax treatment for cap gains (as sold by the fund manager) to the manner in which interest is taxed?
Tax on capital gains
There are 2 ways investors could owe capital gains tax on a bond fund investment. First, there are the capital gains (and losses) generated by the fund manager, as he or she buys and sells securities. Whether the profit from the sale of a bond in the fund is taxed at ordinary income tax rates or is eligible for a reduced capital gains rate is dependent on the same factors as explained above (this is a reference to interest).