How should the after-tax impact of capital gains be calculated if the fund decides to retain them (rather than distribute them as a capital gain dividend)?
A. Federal tax law provides that every shareholder of a fund at the close of the fund’s taxable year must include long-term capital gains retained by the fund and designated as undistributed capital gains in the shareholder’s income tax return for the taxable year in which the last day of the fund’s taxable year falls.14 In addition, the shareholder is deemed to have paid the tax imposed on the fund with respect to the undistributed gains and is allowed a credit or refund for this tax.15 Finally, the shareholder’s basis in his or her shares is increased by the difference between the amount of the includible gains and the tax deemed paid by the shareholder.16 Thus, under federal tax law, if a fund has a June 30 taxable year and retains long-term capital gains of $10.00 per share, every shareholder in the fund on June 30 is treated as having long-term capital gains of $10.00 per share resulting in a tax payable of $2.00 per share (assuming the maximum long-term capital gains rate of 20%)
Related Questions
- How should the after-tax impact of the foreign tax credit be calculated for a fund that either declares dividends or does not declare any dividends during the applicable period?
- How should the after-tax impact of capital gains be calculated if the fund decides to retain them (rather than distribute them as a capital gain dividend)?
- What causes capital gain distributions to be generated by an ICON Fund?
