Summary of Taxes on Mutual Fund Income

While mutual funds are a simple and convenient way to invest, they pose one of the more interesting and complex tax reporting quagmires. Unlike individual stock and bond investments, mutual funds have complex internal transactions that affect how income is reported for tax purposes.

Mutual fund investors receive informational tax returns from their mutual fund companies showing income dividends, capital gains dividends, interest, and return of capital, as well as gross proceeds of sales (redemptions and exchanges). How income is taxed depends upon many factors. In addition to these information returns, the mutual fund investors need to keep careful records of their transactions so they can have a cost basis report to use in calculating capital gains and capital losses.

Remember that even if you reinvest all your income and capital gain dividends and exchange funds within your fund family, you will have taxable income even if you don’t receive cash for your transactions. Keep careful records to avoid running afoul of the IRS.