(It's OK to sell less than six months after the dividend, as long as you held the shares more than six months.) Note that this doesn't match up with the amount of time you need to hold the shares to have a long-term capital gain or loss. The rule applies only if you sell your mutual fund shares at a loss six months or less after you bought them.

Your total amount of gain is still $20,000, but now it's all long-term, meaning a lower rate of tax - if this special rule didn't apply! The $15,000 long-term gain you had before is increased by the $5,000 capital gain dividend from the mutual fund, and the $5,000 short-term gain you had before is eliminated by the $5,000 loss on sale of the mutual fund shares. Now your totals for the year are $20,000 of long-term capital gain and $0 of short-term capital gain. Then you sell the shares for a $5,000 short-term capital loss. You buy enough shares so you'll receive a $5,000 capital gain dividend. Your short-term gain will be taxed at your regular marginal rate of 31%.īeing a crafty investor, but unaware of the special rule we are discussing, you find a mutual fund that's about to pay a capital gain dividend. And that could provide you with a significant tax advantage if you also have short-term capital gains.Įxample: Throughout the year you had $15,000 of long-term capital gain and $5,000 of short-term capital gain. Under the normal rules, you would get a short-term capital loss. Then you sell the mutual fund at $28.25 - the value right after the dividend. You'll treat that dividend as long-term capital gain even if you held the mutual fund shares only a day before the dividend. Capital Gain DividendsĬonsider what would happen if you bought shares in a mutual fund at $29.75 just before the fund paid a capital gain dividend of $1.50. The special tax rules for short-term losses in mutual funds are designed to eliminate that advantage. If the dividend was an exempt interest dividend or a capital gain dividend, the combination of the dividend and the short-term loss would give you an unfair tax advantage. In that situation you might be able to claim a short-term capital loss that was really just a reflection of the dividend you received. Suppose you bought the mutual fund shares just before the dividend and sold them shortly afterward. But it means a special rule is needed for certain capital losses on mutual fund shares. No problem there - that's just the way stocks work in general. For example, if your mutual fund shares are valued at $29.75 immediately before a dividend of $1.50 per share, the value will be $28.25 immediately after the dividend. When a mutual fund pays a dividend, the value of the fund goes down by the amount of the dividend. These rules may convert some or all of your short-term loss into long-term loss - or into a nondeductible loss. This page explains the special rules that apply to certain short-term losses from sales of mutual fund shares.

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