Tax Reporting: Return of Capital (ROC)

Return of Capital (ROC) is a distribution paid to fund shareholders in excess of a fund's current and accumulated earnings and profits. An ROC distribution is generally nontaxable and reduces a shareholder's cost basis in the investment. If an ROC distribution exceeds a shareholder's cost basis, then any additional amount is treated as a capital gain.

Refer to IRS Publication 551, Basis of Assets for further information. 

 

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

Tax Reporting: Dividends/Payments in Lieu

Substitute payments, such as dividends on securities that you have loaned to others, are reported in Box 8 on Form 1099-MISC.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

Tax: Dividends and Distributions: Payments in Lieu of Dividends

If Interactive Brokers lends out your stock or securities, you do not receive dividends (or interest), but payments in lieu of dividends (or interest).  For example, IBKR “loans” stock for use in a short sale transaction to another account and receives substitute dividend payments on your behalf paid while the short position was open.  Because you are not receiving the dividend directly, you receive a payment in lieu.  Refer to Publication 550, Investment Income and Expenses, for more information.

Circular 230 Notice: These statements are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor.

Tax: Dividends and Distributions: Reporting Long-Term Capital Gains Distributions from Mutual and Exchange Traded Funds (ETFs)

Long-term capital gain distributions are reported on Form 1099-DIV in Box 2a (total capital gain distributions).

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

Tax: Dividends and Distributions: Short-term capital gains distributions from mutual funds and exchange traded fund (ETFs)

Short-term capital gain distributions from mutual funds and exchange traded funds (ETFs) are classified as ordinary dividends and reported on your Form 1099-DIV.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

Tax: Dividends and Distributions: Dividend Reclassification

IBKR will amend and re-issue Form 1099 if a dividend is reclassified or reported as an ordinary dividend and later reclassified by the issuer as a capital gain or qualified dividend. The tax character of the dividend indicates whether the dividend is from taxable or tax-exempt income or is a short-term or long-term gain. Reclassifications are shown on the amended Forms 1099 and a Dividend Report, but not on the Activity statement since there is no transaction component. You will receive an email notification if there has been a change to Form 1099, and an amended form will be posted in Client Portal and resubmitted to the IRS.  Consult your tax advisor for further guidance.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

Tax: Dividends and Distributions: Why is there a difference between my activity statements and what is reported to the IRS on Form 1099?

Form 1099 reporting may result in a disparity between what appears on your monthly and yearly activity statements and what is reported on your Form 1099.  For example, transactions reported on Form 1099 must be reported on the trade date.  Your activity statements may reflect transactions based on the settlement date.  In addition, unlike dividends from individual securities which are taxed in the year dividends are paid, mutual fund distributions declared as payable to shareholders of record in October, November or December and paid in January of the following year are taxable to shareholders based on the record date, and not the payment date. Mutual fund distributions with a December record date and paid in January 2, are reported and taxed as dividend distributions in the year they were declared.  

If you invested in a Widely Held Fixed Investment Trust (WHFIT), amounts reported on your Form 1099 may be different from what you received in cash. Trustees and middlemen are required to report the gross amount attributable to the trust income holder.  Since a WHFIT is treated as a grantor trust, reporting requirements are based on how and when the income was received by the trust entity, rather than how and when it was paid out to you.  WHFIT tax information statements are furnished to the trust income holder and may result in a revised Form 1099.  WHFIT tax information statements will be available by March 15 for the previous tax year. View and print the statement by logging in to Client Portal and selecting Reports > Tax menu item.

Refer to IRS Publication 564, Mutual Fund Distributions, Publication 550, Investment Income and Expenses, and consult your tax advisor.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

 

 

Tax: Dividends and Distributions: How do these dates apply to mutual fund distributions?

Investments made within a mutual fund pay dividends and earn capital gains.  Mutual funds declare dividends and capital gain distributions at certain times during the year. Dividend distributions (income distributions) are generally paid quarterly, capital gains distributions once a year usually at year end. These distributions are taxable. Unlike dividends from individual securities which are taxed in the year dividends are paid, mutual fund distributions declared as payable to shareholders of record in October, November or December and paid in January of the following year are taxable to shareholders based on the record date, not the payment date. Depending upon the time you purchase or sell a mutual fund you may receive a distribution of dividends and/or gains associated with those shares.  

Refer to IRS Publication 564, Mutual Fund Distributions, Publication 550, Investment Income and Expenses, and consult your tax advisor for guidance in this area.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

 

 

 

Tax: Dividends and Distributions: Tax Treatment of Money Market Dividends

Interest dividends received from money market mutual funds are considered taxable nonqualified dividends.  Money market funds are a type of mutual fund that tries to increase current income available to shareholders by buying short-term market investments not eligible for reduced tax rates.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

Tax: Dividends and Distributions: How are qualified and nonqualified dividends reported on your Form 1099?

Qualified dividends are included in total ordinary dividends.  Dividends that MAY be qualified (eligible for a lower rates) are reported in a separate box on the Form 1099-DIV.   IB does not determine if a customer meets the minimum holding period requirement for the lower rates to apply. Nonqualified dividends including taxable interest dividends, money market fund dividends and short-term capital gains paid from a mutual fund, are reported as ordinary dividends.  Refer to IRS Publication 550 and consult your tax advisor for proper reporting.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

 

 

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