Question:

Do you have to pay taxes on your dividends on your mutual fund even if the stock value is lower than initial?

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Suppose if I invest $10,000 in a mutual fund. Then in bad times, the value decreased to $9,000, but the fund paid dividends of $1,000 to set it back at $10,000. Does the loss of value and dividends pay offset each other for tax purposes?

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  1. No, the dividend is not an offset.  Dividends are taxable in the year you receive them.  

    What I think you are asking since the value of you stock is less than what you paid for it then, is there a loss.  No, you do not have a loss or gain on a stock or mutual fund until you sell.  Then computing you purchace price plus commission (Purchase Bases) less or plus you selling price plus commission (Selling Basis) will give you you loss or gain of the sale.

    Hope this helps.


  2. Dividends are taxable unless it is within a retirement account or otherwise tax-exempt (like muni bonds).

  3. Not unless you sell.

    Eg, your original basis is $10,000.

    You get $1,000 in dividends and are set up in a DRIP.  The $1000 is taxable and gets added to your basis.  The basis is now $11,000.

    Meanwhile the fund tanks and you sell at $10,000.  Your schedule D shows the $1000 loss.  If it's the same year and your total losses aren't more than $3000, then yeah, they cancel each other out.

    If you don't sell, you still have the dividends to declare.

    If you sell and have more than $3000 in losses, you can only claim the first $3000 this year and carry the rest over to the following year.    

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