When should the lower capital gains rate for qualified five-year gains enacted by the Taxpayer Relief Act of 1997 be incorporated into the after-tax return calculation?
A. For taxpayers in the 20% bracket for long-term capital gains, the qualified five-year gain rate (18%) applies to assets purchased on or after January 1, 2001 (or assets held on January 1, 2001, and subject to a special election to recognize gain on the assets (“mark to market election”)) and held for more than five years.2 Therefore, the 18% rate will not apply until such assets are sold beginning in January 2006. The 18% rate would apply to any distributions designated by the fund as qualified five-year gains on Form 1099-DIV beginning in January 2006, as well as to redemptions of shares purchased on or after January 1, 2001, (or subject to the mark to market election) and held for more than 5 years prior to redemption starting in January 2006. For purposes of the after-tax return calculation, a fund should assume that a shareholder did not elect to mark to market (and recognize gain upon) any shares held on January 1, 2001. Thus, in computing after-tax returns, the 18% rate should
