Selling Mutual Funds / 1099-B

[daware]

I had two mutual funds from around the year 2000. I transferred them in kind from one company to Fidelity. Each year, I was taxed on dividends and capital gains and kept a record. I sold them in 2021 at Fidelity to purchase different funds. They appeared on my 1099-B form from Fidelity as short and long-term capital gains. I ended up listing the selling of the funds in question when doing my tax return. I'm thinking because paying taxes on them yearly, it was not needed to list and I paid too much in taxes. Do I file an amendment and remove the fund in question from the 1099-B section? What should I do? My dad's CPA friend said you pay taxes each year on mutual funds and not when you sell them. Is that true?

[Critter-3]

Ok ... you are confused.   You paid taxes on the earnings (interest/dividends/cap gains)  each year as they are earned... what you did with the earnings is immaterial.  You do not pay taxes twice on the earnings. 

Now with most mutual funds you allow the earnings you already paid taxes on to remain in the account and BUY more shares of the mutual funds.  Thus your basis in the new shares are the earnings you paid taxes on.  Thus when you sell off those shares you will have a basis in them just like all the other shares you owened.   Did the broker's account form 1099-B account for the cost basis correctly ?  Thus you do not pay taxes twice on the earnings due to the reinvestment.   If you don't understand this concept or have questions on the broker's reporting statements then please contact them to be educated on this matter. 

[dmertz]

I suspect that you or your dad misunderstood what the CPA said.  If that's really what the CPA said, your dad needs to find a more competent CPA.

The dividend and capital gains distributions are from transactions on the components within the fund.  On these distributions you paid taxes and reinvested the proceeds by purchasing additional shares in the mutual fund, with the amount reinvested becoming part of your basis in the mutual fund.  (Note that the reinvestment of dividends and capital gains results in no net change in the total value of your shares.  The increase in the number of shares is exactly offset by a reduction in the Net Asset Value of the shares.)  Each reinvestment adds to the cost basis that was your original purchase price of the shares and increases the number of shares that you own.

The taxable amount of the sale of the shares is then the proceeds from the sale minus the basis.  The sales are broken up into short-term and long-term, with the short-term shares being those that were purchased by the reinvestment of the dividend and capital gains distributions within one year of the sale.  Short-term gain is taxed at ordinary income tax rates and long-term gains are taxed at long-term capital-gains rates.  In other words, the taxable gain or loss will be the difference between what you sold the shares for and what you paid for the shares.

The reporting will be in up to four categories:  Short-term covered shares for which Fidelity knows the cost basis, short-term uncovered shares for which Fidelity does not know the cost basis, long-term covered shares for which Fidelity knows the cost basis and long-term uncovered shares for which Fidelity does not know the cost basis.  For the covered shares, Fidelity will have reported the cost basis.  For the uncovered shares, if any, you may need to determine the cost basis yourself, particularly if the previous brokerage did not provide this information to Fidelity upon transfer of the shares to Fidelity.  The sale of each category must be entered separately into TurboTax.

Review your entry of the Form(s) 1099-B and the results on Forms 8949 and Schedule D to see if your filed tax return correctly shows taxation of the net gains or losses on your short- and long-term shares.

[Mike9241]

You need to check the tax basis Fidelity reported on sale. many times when securities are transferred from one company to another, the company that got them uses as cost (tax basis) the Fair Market Value on the date of transfer which is not your true tax basis  

[Opus 17]

Let's keep this at one broker for a moment.  If you look at your quarterly or annual statements, you will see several things.  You will see interest, dividends, realized capital gains, and unrealized capital gains.   Suppose fund manager sells Exxon and buys Chevron.  The sale of Exxon creates a gain or loss that is reported to you on your annual 1099-B.  Suppose Exxon paid a dividend, that was reinvested for you in more shares of the fund, but it was also taxable on your year-end 1099-DIV.  

So suppose you buy a fund for $10,000, and at the end of year 1, the value is $10,500.  You pay tax on $100 of capital gains and $100 of dividends.  That means your cost basis is increased to $10,200 (the amounts you paid tax on) and the difference between the cost basis and share value of $300, is unrealized capital gains. You only pay tax on the gains you realized by the fund manager selling component shares.  The unrealized gain, which comes from increased share prices, is not taxed year over year.

Now suppose you keep the shares 10 years.  Over the years you paid tax on $10,000 of gains and dividends.  Your cost basis is now $20,000. If the value of the shares is $25,000, you have $5000 in unrealized gains.  You already paid tax on part of the increased value, but not all of the increased value.  If you sell your shares, that $5000 is now taxable capital gains to you.

So yes, you do need to report the sale, and this should all be reported by the broker on your year-end tax statements.

The one caveat, as mentioned, is to make sure that the basis adjustments from broker 1 were properly carried over to broker 2.  You will want to compare your last statements from the old broker with your first statements from Fidelity.