How to reinvest capital gains?

harry askenazi

I have many reinvestments of short and long term capital gains that Quicken downloaded and automatically entered as reinvestment of dividend. Does it matter if the amount and shares are listed next to "dividend" instead of the appropriate short or long term category?

See the attached screenshot. In this hypothetical example I am reinvesting $461.40 from a Long term cap gain distribution. But Quicken shows the $ and shares in the dividend field. DO I need to go back in time and update each transaction or can I leave as "dividend" without any reporting/reconciling discrepancies down the line?

Boatnmaniac

Per the IRS, capital gains distributions made by mutual funds should be considered "...long-term capital gains no matter how long you've owned shares in the mutual fund."  Long term cap gains are taxed at the normal income tax rate, just as are ordinary dividends.  So, in your situation, you can just leave these transactions alone unless you want to see the income classified more correctly in income and tax reports or if you plan to use Quicken data for tax filing.  If you plan to use the Quicken data for tax filing then you want to make sure your Quicken data matches your broker's tax forms exactly or you risk flags being raised at the IRS.

Sherlock

I suggest editing the transactions appropriately to correct the imported entries.  For tax deferred accounts, it doesn't matter.  Otherwise, long-term cap gain distributions  are generally taxed at a lower rate.  

Boatnmaniac

Thanks for the correction, @Sherlock .  I confused ST and LT cap gains tax rates.  You are right, LT cap gains are taxed at a rate that is lower than normal income tax rates.  Normal dividends are taxed at normal income tax rates. 

Whether or not it's worth it to go back and correct past transactions really is a judgment call on what you plan to use the data for and how significant the dollars are.  I personally wouldn't spend any time correcting transactions prior to 2019 (especially if there are a lot of them) since that is water under the bridge.  I would, however, for sure correct any transactions for 2020.

Jim_Harman

To further clarify (or perhaps confuse matters), there are long term capital gains, short term capital gains, ordinary dividends, qualified dividends. (a subset of your ordinary dividends) and tax exempt dividends.

Currently long term capital gains (gains on assets that were held for more than 1 year) and qualified dividends (generally dividends on stocks and stock mutual funds and ETFs) are federally taxed at the reduced capital gains rates.

Short term gains and non-qualified dividends (generally income from interest and taxable bonds) are taxed at the full income rates.

As the name implies, tax exempt income is (mostly) not taxed at the federal level.

Also these types of income may be taxed differently at the state level.

Often you don't know how much of a dividend was qualified until you get the 1099 at the end of the year. Quicken's support for qualified dividends is very limited; it basically treats all taxable dividends as ordinary.

None of this matters for tax deferred accounts. For traditional IRAs and 401(k)s you pay tax at the income rate when you take money out of the account. For Roth accounts you pay the tax up front and no tax when you withdraw the money. So for these accounts it does not matter how you record the distributions.

Disclaimer: I am not a tax advisor. Consult your tax advisor for more info.

q_lurker

harry askenazi said:

I have many reinvestments of short and long term capital gains that Quicken downloaded and automatically entered as reinvestment of dividend. Does it matter if the amount and shares are listed next to "dividend" instead of the appropriate short or long term category?

See the attached screenshot. In this hypothetical example I am reinvesting $461.40 from a Long term cap gain distribution. But Quicken shows the $ and shares in the dividend field. DO I need to go back in time and update each transaction or can I leave as "dividend" without any reporting/reconciling discrepancies down the line?

I see a couple of levels to your question.  Does it matter ...?  If you are trying to use Quicken to track different types of income (most likely for tax preparation or tax planning), then yes, it matters and you should alter the downloaded transactions to match that reality.  I tend toward that objective and I have found myself making that type of adjustment when preparing tax return filings. 

If all you're after is that you acquired x.yxw shares on a date for a price as a reinvestment, then no, it does not matter.  You can leave the transactions referring to dividends even though the reality is that they fall in a different class of income.    In terms of investment performance measures, I don't think there is any difference in how LT Cap Gain distributions are handled vs dividends or interest.  

A Return of Capital distribution IS different than the other forms, though your question did not raise that as a possible issue.  

NotACPA

Fidelity Investments, my brokerage and fund company, will pay at year end Divs, LT Gains, & Short Term Gains all at the same time.

All of them are downloaded as Divs ... with the actual action described in the memo field.

I just accept them all, and then edit those that aren't acrually divs to whatever the appropriate action actually is.

Lastly, they've also downloaded a BUY for the entire dollar amount.