Tax Treatment of Mutual Funds

What this video covers

• Why a mutual fund pays zero federal income tax at the fund level under Subchapter M, and the 90% distribution floor that preserves regulated investment company (RIC) status
• How ordinary dividends, qualified dividends, short-term capital gains distributions, long-term capital gains distributions, and return of capital are each taxed to the shareholder
• Why long-term capital gains distributions are taxed at long-term rates even if the investor held fund shares for less than one year
• The phantom tax rule: why reinvested dividends and capital gains are taxable in the year received despite no cash changing hands
• Why reinvested shares are purchased at net asset value (NAV) with no sales charge, and how each reinvestment creates a new tax lot with its own cost basis and holding period
• How front-end sales loads are added to cost basis, and how return of capital reduces cost basis to create larger taxable gains later