Question

A client buys 100 shares of a mutual fund on December 28, 2011, for $4,000 and receives a capital gains distribution of $2.40 per share on March 6, 2012, which is taken in cash. He sells his 100 shares for $4,300 on June 19, 2012. For tax purposes, this transaction will result in a:

1) $240 long-term capital gain.
2) $240 long-term capital gain and a $60 short-term capital gain.
3) $300 short-term capital gain.
4) $60 short-term capital gain.

Answer 1

The client will have a $240 long-term capital gain from the distribution and a $300 short-term capital gain from the sale of mutual fund shares. Option 3, which refers to only the $300 short-term capital gain, is the correct answer.

Step-by-step explanation:

To calculate the capital gains for tax purposes on the mutual fund transaction described, we need to consider two different events: the capital gains distribution and the sale of shares.

Capital gains distributions from mutual funds are treated as long-term capital gains, regardless of how long the investor has held the shares. Hence, the $2.40 per share distribution on 100 shares, which totals $240, will be treated as a long-term capital gain.

Next, we consider the sale of the mutual fund shares. The initial investment was $4,000 and the shares were sold for $4,300, yielding a $300 profit. Since the shares were held for less than a year (from December 28, 2011, to June 19, 2012), this profit will be treated as a short-term capital gain.

Summing it up, the client will have a $240 long-term capital gain from the distribution and a $300 short-term capital gain from the sale of shares.

Given the options listed, option 3) $300 short-term capital gain is the most accurate description because it reflects the gain from the sale of shares, without mixing the categories of capital gains.