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A capital gain is the difference between the purchase price and the selling price of an asset (i.e., stocks, bonds, and mutual fund shares) which results in a profit. For example, if a stock for $100 is purchased and later sold for $120, the capital gain is $20. A capital loss results from selling an asset at a lower price than the purchase price.
When a mutual fund realizes more gains than losses, mutual funds are generally required by law to distribute the net gains to shareholders by calendar year end. These distributions, which typically occur quarterly, semi-annually or annually, are made in order to satisfy such requirements.
These distributions are taxable to shareholders, unless the mutual funds are held in a 401(k) plan, IRA, 403(b) account or other tax deferred accounts. Investors in tax deferred products will not have tax consequences as a result of these distributions. Also, some distributions are specifically exempt from taxes — for example, income from municipal bond funds is typically exempt from federal taxes.
Short-term capital gains result from the sale of an investment held for less than a year. A distribution of short-term gains by a mutual fund is taxed as ordinary income.
Long-term capital gains result from the sale of an investment held for more than a year. A distribution of long-term gains by a mutual fund is taxed at the investor's capital gains tax rate.
Investors are required to include these amounts on their federal income tax return for the year when they are received.
"Buying a dividend" refers to purchasing a mutual fund just prior to a distribution by that fund. If the fund is held in a taxable account, this generates an unnecessary tax bill. In essence, a portion of the investment is returned to the investor as a taxable distribution.
A mutual fund's cost basis is the cost of fund shares (determined by various means) used to help shareholders calculate the taxable gain or loss of their investment if they redeem their shares. For BlackRock funds held at the transfer agent, this information is included in our Quarterly Statements when available.
Yes, mutual fund distributions are considered taxable income, and shareholders must pay taxes on their gains even if they reinvest them into the mutual fund for more shares.
BlackRock manages our mutual funds consistent with their investment objectives. Though we are mindful of the tax implication of capital gains on our shareholders, investment decisions take into account other factors as well and are based upon prudent portfolio management in accordance with the each fund's investment strategy.
The Record Date is the date used to determine which shareholders are entitled to a given distribution; shareholders of record as of that date receive the distribution.
The Ex-date is the next date after record date on which the net asset value (NAV) drops by the amount of the distribution. Those shareholders who reinvest their distributions receive additional shares.
The Payable Date is the date that payments are sent to shareholders who do not reinvest their distributions. Those shareholders who reinvest their distributions receive additional shares.
Even if a mutual fund's NAV has fallen during the year, it is still possible that securities sold by the mutual fund within the year resulted in a capital gain. For example, a security bought three years ago at $10 that appreciated and was sold this year at $20 will realize a $10 capital gain.
When profits from sales of securities exceed losses, they accumulate and contribute to the rise of the net asset value (NAV) of the fund. Since a portion of the NAV is being deducted and distributed to the shareholders, the NAV will drop by the distribution amount. For example, a fund's shares sell at a NAV of $10. If sales of the fund's securities have realized a profit of $2 a share during the year, a capital gain distribution of $2 will be deducted from the NAV on a specified date and on that date the fund share price will decline to $8.
This drop in NAV does not reflect a loss since the portion deducted from NAV is passed through to shareholders. Distributions do not impact a mutual fund's total return as they are taken into account as part of a fund performance.
Please keep in mind that the NAV will also reflect market activity. Distributions do not impact a mutual fund's total return.
A Form 1099-DIV is sent to shareholders by investment fund companies to provide a record of all taxable capital gains and dividends paid, including those that have been re-invested in a given tax year. Tax Form 1099-B will also be sent if a shareholder has redeemed shares from their BlackRock mutual fund. Form 1099-INT is sent to shareholders who have received dividend distributions on municipal bond funds.
Mutual fund companies report dividends and short-term and long-term capital gains separately on Form 1099-DIV for the year when received. These amounts are reported to the IRS for tax purposes. Investors use Form 1099-DIV to help report income received from investments on their tax return each year.
The IRS does not require tax reporting on any taxable amounts less than $10 for a calendar year. A shareholder who did have a taxable event during the year worth more than $10 and did not receive a 1099 can contact BlackRock shareholder services at 800-441-7762 between the hours of 8 a.m. and 6 p.m. (ET), Monday through Friday.
For more information on BlackRock Funds, please contact BlackRock shareholder services at 800-441-7762.
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The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.
The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.
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