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I'm currently working on my tax return for 2018. I have taken my 1099's and calculated short term and long term capital gains and losses for my mutual funds where basis is reported and unreported. On my 1099 is listed capital gain distributions. Haven't I already taken care of this in part 1 and part 2 of schedule D, by listing the proceeds and costs. Line 13 seems like double taxation.

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If you have invested in a mutual fund, then there are two kinds of capital gains that you need to report on your tax return.

  • If you sold mutual fund shares (you can't sell the shares to anyone other than the mutual fund that issued the shares), then the fund (or your brokerage) will send you a Form 1099-B stating what the capital gains on the sale were, breaking these down into short-term and long-term gains that you report on Schedule D.
  • In addition, mutual funds pay you dividends that they have collected from the underlying stock shares that the fund owns, as well as short-term and long-term capital gains that the mutual fund generated by selling some of the stocks that it holds (quite unbeknownst to you). These distributions are reported to you (and the IRS) on Form 1099-DIV and you report them all on your tax return in the appropriate places (Long-Term capital gains on Line 13 of the new Schedule 1 attached to your Form 1040 and also on Schedule D itself if you have other entries on Schedule D; if you don't have any capital gains to report on Schedule D other than mutual fund distributions, then you check a box on Schedule 1 and skip Schedule D entirely). The reason for this distribution is if the money were not distributed, then the fund would have to pay taxes on those dividends and gains, thereby lowering the return that it can report to the investor where said return is a source of bragging rights and Morningstar Stars in advertisements. Capital losses, on the other hand, are not distributed to the shareholders but are retained by the fund to be used to offset future gains.

So, No, there really isn't double taxation of any kind. There are two sources of capital gains income from a mutual fund that are reported on two different Forms 1099 (they differ in the qualifier -B or -MISC), and both must be reported on the income tax return and the appropriate taxes paid.

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