Tax Treatment of Mutual Funds

What this video covers

• How conduit (pipeline) tax treatment under Subchapter M eliminates double taxation by passing fund income through to shareholders
• The difference between the 90% gross income test (qualifies a fund as a regulated investment company, or RIC) and the 90% distribution test (keeps conduit treatment), and what happens when a fund fails the second test
• Why ordinary income dividends and short-term capital gains distributions are taxed as ordinary income, while qualified dividends and long-term capital gains distributions get preferential long-term rates
• Why long-term capital gains distributions always receive long-term treatment regardless of how long the investor held the fund shares
• How reinvested distributions trigger a phantom tax in the year received and create new tax lots with their own cost basis and holding period
• How front-end loads increase cost basis for tax purposes, while back-end loads (contingent deferred sales charges, or CDSCs) reduce sale proceeds instead
• Why return of capital is not immediately taxable but reduces the investor's cost basis, creating larger gains later