How should the capital gain and loss netting rules be applied in computing return after taxes on distributions and redemption of fund shares?
A. Instruction 7(d) to Item 21(b)(3) of Form N-1A provides in part that “applicable federal tax law should be used to determine whether and how gains and losses from the sale of shares with different holding periods should be netted, as well as the tax character (e.g., short-term or long-term) of any resulting gains or losses. Assume that a shareholder has sufficient capital gains of the same character from other investments to offset any capital losses from the redemption so that the taxpayer may deduct the capital losses in full.” In calculating the capital gains taxes (or the benefit resulting from tax losses) on a redemption of fund shares, the federal tax law netting rules should first be applied to losses and gains from the sale of fund shares. A fund should only assume that a shareholder has sufficient gains of the same character from other investments to offset any capital losses from the redemption after the fund has netted all gains and losses from the sale of fund shares.
