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I am writing Sch D software and researching the proper way to report certain capital gains distributions from leveraged EFTs, for example TYH. These distributions are reported as "short term", see here. I confirmed by phone call with the fund manager that these are definitely short term gains. However, at the end of the year, the distributions appear in Box 2a of the 1099-DIV, which is reserved for long term capital gains distributions from mutual funds and REITs. According to IRS Pub 550, amounts in Box 2a would usually be reported in line 13 of the Sch D, which gets summed into long term capital gains, see here. Making things even more confusing, the IRS Sch D Instructions, under the heading Capital Gain Distributions, states that:

These distributions are paid by a mutual fund (or other regulated investment company) or real estate investment trust from its net realized long-term capital gains. Distributions of net realized short-term capital gains are not treated as capital gains. Instead, they are included on Form 1099-DIV as ordinary dividends.

Questions: Is the ETF incorrectly reporting these distributions as short term capital gains when it should be reporting them as dividends? If not, how should the recipient report these clearly short term gains to the IRS? Thanks in advance.

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Unless you have an actual 1099-Div from the ETF covering a period when they distributed net short term gains, I don't think you will know how they are actually handling the reporting. The fact is that the Direxion page you linked lists three categories (Income Dividend, Short Term Capital Gain, Long Term Capital Gain) which do not appear on the 1099-DIV (which instead have Total ordinary dividends (1a), Qualified dividends, and Total capital gain distributions, the last being in Box 2a).

Despite someone having told you that TYH's short term gain will be placed into Box 2a, if the fund is following normal IRS requirements, the value will be included in Box 1a and not in Box 2a. Box 1a, ordinary dividends, is the sum of income and short term gains. I think it is more likely there was a miscommunication than that the fund is not following normal 1099 reporting rules.

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  • I do have an actual 1009-div, and the distribution is listed in box 2a, but the a broker generated the 1009-div, not the fund. I happened to speak to the fund manger again today and asked how brokers get this info from the fund. He said it is by way of a notification to the exchange and a press release to brokers. It's up to brokers to generate their 1099-div correctly, which in this case apparently did not happen.
    – ThomasMcLeod
    Mar 23, 2011 at 1:15
  • Perhaps on that notification the fund didn't use the same terminology that the 1099 uses and the broker just saw "capital gain", or maybe the fund misclassified it, or maybe something else is going on. In any case, it seems like it would be hard to squeeze a review/correction out of the bureaucracies and not really worth it since even if it was changed it wouldn't benefit you. The income did get reported and will get onto your return, that's the main thing.
    – mgkrebbs
    Mar 23, 2011 at 2:40

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