How do capital gains and dividend taxes work?

meco1999: How do capital gains and dividend taxes work?
Assume you own a stock mutual fund or ETF in a taxable brokerage account for 10 years. Do you have to pay capital gains and dividend taxes every year you own it, even if you didn’t sell any shares during the year? Or do you only pay the capital gains and dividend taxes after you sell in year 10? Or do you pay dividend taxes every year (assuming you reinvest the dividends in your ETF every year), but only pay capital gains taxes after you sell in year 10?

Assume you’re in the 25% tax bracket.

Answers and Views:

Answer by J-10
You pay taxes on dividends generated each year.

You pay capital gains tax the year you sell it – when the gain is realized. Unrealized gains (appreciation in value before selling it) is not taxed year to year.

Answer by Caveat Emptor
You pay tax on all dividends and capital gains (if any) earned each year. The brokerage will send you 1098s and 1099s with that information. You only pay capital gain on the SALE of securities in the year you actually sell them.

Answer by Michael Plaks
There are two layers of ownership at play here.

1. You own shares of the mutual fund. As owner of the fund shares, you pay tax on the dividends every year, whether or not you reinvest dividends. The dividends are reported to you every year by the mutual fund on form 1099-DIV.

You pay capital gain on these shares when you get rid of them – either by selling them or by exchanging them into a different fund. When that happens, the mutual fund will send you form 1099-B.

2. Mutual fund itself owns stocks, bonds, and other securities. They sell those securities whenever they feel it’s good investment decision, and you have no control over that. When they sell stocks, the fund – not you – generates capital gain. However, the fund does not pay capital gain tax. Instead, it distributes this tax proportionally to all shareholders, including you. So, even if you did not sell anything in 2010, but the fund did – you will be stuck with paying capital gain on THEIR transactions. The fund reports these transit gains to you on form 1099-DIV, as “capital gain distributions.”

So, in short, you pay ongoing taxes on dividends and on *their* capital gains, plus you pay one-time capital gain when you sell your shares.

Michael Plaks, EA, Houston TX
www.MichaelPlaks.com

Answer by tro
you pay on the dividends that are reported to you on a 1099 D each year
if you do not sell the stock you will not have any statement reporting the proceeds(1099 B) therefore, you pay only on the dividends