Are reinvested dividends from a mutual fund taxable?
Most funds offer you the option of having dividend and capital gain distributions automatically reinvested in the funda good way to buy new shares and expand your holdings. Most shareholders take advantage of this service. However, you do not avoid tax this way. Reinvested ordinary dividends are taxed as ordinary income, just as if you had received them in cash. Reinvested capital gain distributions are taxed as long-term capital gain. Tip: If you reinvest, add the amount reinvested to the “cost basis” of your account. (“Cost basis” is the amount you paid for your shares.) The cost basis of your new shares purchased through automatic reinvesting is easily seen from your fund account statements. This information is important later on when you sell shares. Make sure that you don’t pay any unnecessary capital gain taxes on the sale of mutual fund shares because you forgot about reinvested amounts.
A. Most funds offer you the option of having dividend and capital gain distributions automatically reinvested in the funda good way to buy new shares and expand your holdings. Most shareholders take advantage of this service. However, you do not avoid tax this way. Reinvested ordinary dividends are taxed as ordinary income, just as if you had received them in cash. Reinvested capital gain distributions are taxed as long-term capital gain.
