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(For Funds not held in a retirement account)
Capital Gains distributions from Mutual Funds that are reinvested are treated as-if they were two steps.... you received the $$ (and yes...it is reported as income), and then you invested them.
As such, yes, they are added to taxable income but 1) Box 2a amounts reported on a 1099-DIV are used in the special reduced capital gains tax calculations, and 2) the new investments do add to your "basis" in the mutual fund they were re-invested into, reducing your basis in the future when you sell any.
(For Funds not held in a retirement account)
Capital Gains distributions from Mutual Funds that are reinvested are treated as-if they were two steps.... you received the $$ (and yes...it is reported as income), and then you invested them.
As such, yes, they are added to taxable income but 1) Box 2a amounts reported on a 1099-DIV are used in the special reduced capital gains tax calculations, and 2) the new investments do add to your "basis" in the mutual fund they were re-invested into, reducing your basis in the future when you sell any.
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