Tax Facts

7941 / How is the shareholder taxed if the mutual fund pays a dividend in its portfolio stock or securities rather than in cash?

The taxability of a dividend distribution is the same whether the distribution is in cash or portfolio stock or securities; thus, the distribution will be treated as an ordinary income dividend, exempt-interest dividend, or capital gains dividend, as the case may be (see Q 7938 to Q 7940). The amount (if any) that the shareholder reports on the income tax return is the fair market value of the stocks or securities received as of the date of distribution.1

For temporary guidance regarding certain distributions declared on or after January 1, 2008, and on or before December 31, 2012, by publicly traded mutual funds when shareholders have the ability to elect to receive stock instead of cash, see the discussion of Revenue Procedure 2010-12 in Q 7977.

1.  IRC § 301(b); see Rev. Rul. 57-421, 1957-2 CB 367.

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