Can I defer defer reinvested dividends qualified dividends & a capital gain distribution as income for this tax year?

[rfischer]

Can I defer reinvested dividends and capital gains until I recieve the distribution?

[AmandaR1 · Accepted solution]

No, even if you don't receive the cash, when you sell a stock and buy another, it's treated as a capital gain sale. All of your sale gains and losses are netted as short-term and long-term, with long-term having special lower tax rates. 

Stocks you hold that appreciate are not taxed. Holding stock is the only way to defer income. Any sale or trade triggers capital gains and losses (as reported on your year-end statements).  

Dividends are always treated as dividend income in the year they are paid, regardless of if you choose to reinvest them. As long as they reported them on form 1099-DIV, it's income because they are excess profit from the company that's paid to you. In other words dividends don't affect your stock basis/investment at all. 

If you didn't have a choice to reinvest the dividends and they were stock dividends, the rules get a bit more complicated. Let me know if this applies. 

[rfischer]

I will need to check with my broker tomorrow to be sure about the dividend choice but I know I had no choice on the capital gains distribution reported on the 1099-D. I also received a 1099-B from a change to my portfolio and reinvested the sale. I am inclined to use code R on the IRS 8949 to defer until I withdraw funds. Is this acceptable or is there a better way?

[TomYoung]

"I will need to check with my broker tomorrow to be sure about the dividend choice but I know I had no choice on the capital gains distribution reported on the 1099-D."

You're going to have to provide a fund name here.  Typically the decision to reinvest ANY fund distribution into new shares of stock is entirely in you hands and, accordingly, taxable.  Maybe there's an exception to that generalization, though I'm not aware of any.  But by providing the funds name at least the issue could be researched.

As it stands right now I can't see how you can justify deferring gains.

[rfischer]

The capital gains distribution was from a sale of mutual funds which i did not request or have knowledge of so I had no choice, does this change how I report or defer this?

[TomYoung]

You're going to have to provide more detail and explain exactly what went on here.

The very words "capital gains distribution" certainly imply that a mutual fund MADE that distribution to you and, as already explained, if you had that distribution automatically reinvested that doesn't change the fact that it's income to you.  But now you've introduced the notion of "a sale of mutual funds" and suggesting that it "just happened", (which certainly can happen if you're not keeping current with what's going on), but if that "sale" was reported to you on a 1099-B then it's certainly "your" sale to report.

I previously asked you to name names and I'm adding to that "tell us exactly what went on here."  You're just being too vague and to coy.

[rfischer]

It is on a 1099-D box 2a not a 1099-B and shows as Total capital gain distributions. When I asked my broker what it was for  he said there was movement within the Mutal funds I hold. The year end report shows dividend s & distributions from Blackrock equity Cl C, Fidelity Adsvisors Class C, Janus Henderson Class C, MFS emerging Mrkts Class C, Principle Global Diversified income Class C, Principle High yield Class C. AIG Focused Dividend Fund Class C & Victory Sycamore Established Value Fund Class C. Again I had no choice in the Mutual Fund transactions, the dividends I have always had reinvested and I understand dividends are income this year.

[TomYoung]

You include the "Total capital gains distributions" in your taxable income.

When you invest in a mutual fund you understand that the mutual fund holds a bunch of securities inside it.  From time to time the managers of the mutual decide to sell some security, in whole or in part, (and hopefully at a profit), because they see what they think are better opportunities in some other security.  

Mutual funds, by law, must distribute substantially all of their income to their shareholders every year.  If the mutual fund has net capital gains then those capital gains get distributed too, just like dividends or interest do.  The capital gains distributions get reported on the 1099-DIV and you report them on your income tax return, even though you didn't initiate the sales in the mutual fund or have any say in the matter.  That's just the way it works.  Mutual funds are "pass through" entities and don't pay income taxes.  Substantially all their income is "passed through" to shareholders so they can report it on their own income tax returns.

If you don't want to be surprised by capital gains distributed to you then instead of investing in mutual funds look to ETF's.  Because of the way ETF's are organized and the way they function - even though they are buying and selling securities too -  they typically don't have capital gains that need to be distributed to shareholders.

[fanfare]

This is a feature of mutual funds in regular (not tax-deferred) investment accounts. the fund will issue dividends or other gains and reinvest them. You get no cash, but the amounts are all taxable. Your basis in the fund goes up.
Capital gains on a 1099-DIV are short term capital gains.
It is important to track your basis, or make sure your mutual fund company is tracking it for you .

[Carol S]

The dividends were automatically reinvested and  never sent to us.  We didn't realize this until we received the information from our financial advisor for tax year 2020. we had a financial loss but we haven't pulled out.  Do we pay taxes on these dividends, and where do we, in TurboTax, show we had a financial loss over the year?

Another area of concern is 1099-INT. We do have some interest accumulated in those investments.  Do we pay taxes on those investments? Please reply to these concerns.

[Carol S]

As it stands right now we have a financial  loss from last year not a financial gain. I need to know if there is a place in our tax filingto show this loss.  Again we have not pulled anything out from our investments. 

[gloriah5200]

No, you report a gain or loss on financial investments only when you sell the investments/capital assets, not when the day-to-day value changes in the market.

If you did not sell or dispose of the capital assets, but the current fmv of them has decreased, then you do not report a loss on the sale on your tax return until the sale or disposition occurs..

[VolvoGirl]

Yes you pay tax on dividends and interest even if it was reinvested.  A reinvested dividend is really 2 transactions, a dividend and then a buy.  Like if they sent you a dividend check and you bought more shares.  So when you eventually sell some shares don't forget to add the reinvested amounts to your cost so it will reduce any gain.

And this all assumes this is in a regular accounts.  Not any 401K, IRA or retirement accounts.  Those work differently.