Subchapter M & Fund Distributions — Q&A

Distributed by a US corporation or qualified foreign corporation, and the investor (or fund, for mutual fund dividends) must meet the IRS-specified unhedged holding period.

At the investor’s federal marginal income tax bracket (up to 37%).

$15 if qualified (15% × $100) vs. $22 if non-qualified (22% × $100).

No — always non-qualified. Interest passed through via a fund dividend is taxed like ordinary income.

Added to cost basis when buying; subtracted from sales proceeds when selling. Example: $49 NAV + $1 sales charge = $50 cost basis.

Long-term: held more than one year (one year and a day). Taxed at 0%, 15%, or 20%. Short-term: one year or less — taxed at income tax bracket (up to 37%).

Up to $3,000 deducted this year. The remaining $10,000 rolls over to offset future gains.

Specific share identification ($7.50/share gain — lowest tax). Average cost, single category (ACSC) is only available to mutual funds and locks the investor in once elected.

7.5%. DY = annual dividend income ÷ current NAV = $3 ÷ $40. Capital gain distributions are NOT included — a common exam trick.

IRS rule letting investment companies and REITs avoid fund-level tax by passing income to shareholders. Must distribute at least 90% of net investment income to qualify; most distribute 98–99%.