Tax on sale and distribution of mutual fund

Question

I have investments in a mutual fund. That fund grew in value (i.e. had a distribution) So I got a 1099-DIV. I understand I have to pay capital gains tax on this growth.

However I also sold some of the shares of the fund. So I also got a 1099-B for the sale. I assume I have to pay taxes on this too.

Is the tax rate the same for a distribution and a sale?

I don't quite understand why I'm double taxed on the sale. Short of just "that's the way it is, deal with it" why did this happen?

EDIT: I did some more research and I think I may understand now, plz correct me if I'm wrong

The taxes I pay as part of the 1099-DIV are not taxes on the growth of the fund. They are only the taxes on money earned if the fund itself sells shares or if the shares themselves pay out a dividend.

If for example I owned 1 share of XYZ fund at $100 and over the year it grew in value to $110, and the fund itself never sold any shares, and the underlying assets in the fund didn't pay a dividend, then my 1099-DIV would show zero capital gains and I wouldn't get a 1099-B

If the next year I then sold that one share for $110 I would again not get a 1099-DIV but I would get a 1099-B. I'd owe taxes on the $10 capital gains I saw.

If I then sold that $110 share of

Answer 1

The money reported to you (and the IRS) on Form 1099-DIV has two major components; the amount of dividends (and short-term capital gains) received by the mutual fund from the investments it owns, and the (net) long-term capital gains made by the fund on the sale of some of its assets. (If the net capital gains are negative, i.e. a capital loss, then the loss is not reported on Form 1099-DIV but retained by the fund to offset capital gains in future years.). You pay taxes on the unqualified dividends and short-term capital gains at ordinary rates (the subcategory of qualified dividends is handled differently), and the long-term capital gains at the capital gains rate. You have to pay these taxes even if you reinvested all the money back into the fund, thus acquiring more shares of the fund.

Regular mutual fund shares cannot be sold to some other investor, only back to the mutual fund company and you are deemed to have redeemed the shares (ETFs can be different), and you pay taxes on the gains on those shares at long-term capital gains rate or short-term rates (same as ordinary income rates) depending on what you sold. If you specify which shares you are selling, then the appropriate categories are applied to each lot of shares and shown on the 1099-B, but otherwise, you are deemed be using the average-cost method and so you are quite likely to have a mix of long-term and short-term gains, the latter from the shares that you acquired as a result of re-investing the most recent distribution from the fund.