Frequently Asked Questions
Here are some frequently asked questions on capital gains distributions.
What are capital gains?
Under federal law, mutual funds are required to distribute to shareholders net gains that occur when a fund sells a security and receives a profit as a result of that sale. When a capital asset is sold, the difference between the amount the asset is sold for and the base cost for which it was purchased is a capital gain or a capital loss. Capital assets include property held for investment, such as stocks, bonds, or shares of a mutual fund. If a mutual fund has gains that cannot be offset by losses, those gains must be distributed to shareholders in the form of either a short-term or long-term capital gain or a combination of the two.
Mutual funds typically distribute capital gains to shareholders annually, near the end of the calendar year. It is important to note that, in certain situations, capital gains may be distributed to shareholders more than once a year at any time of the year.
How are capital gains distributed to shareholders?
Shareholders may receive capital gains distributions in cash, or they may reinvest the distributions into their accounts as additional shares (or a fraction of a share).
Distributions are subject to income tax in the year that they were declared and are reported annually, if applicable, on Form 1099-DIV, whether they are received as cash or reinvested into a shareholder's account.
How can mutual funds pay capital gains distributions when the market is either flat or down?
When the value of a fund holding increases, the fund has an unrealized gain until the security is sold. Once this security is sold, however, the fund realizes the gain and must pay a distribution unless the gain is offset by capital losses. Consequently, a fund’s capital gains distribution in a particular year is a result of the sale of securities that may have appreciated in value over time, perhaps during prior years when the fund’s returns were positive.
What is a shareholder’s tax liability on capital gains?
Capital gains can be paid out to shareholders or reinvested into a fund in the form of new shares. Either way, shareholders in taxable accounts are subject to taxes on the payout in the year the capital gains are distributed.
The length of time that a fund owned a security determines the rate at which the capital gains will be taxed. For securities held for 12 months or less, capital gains are considered short-term capital gains, while capital gains distributions for those held for more than 12 months are considered long-term capital gains.
The American Taxpayer Relief Act of 2012 (P.L. 112–240), or ATRA, changed the rates for long-term capital gains (which includes long-term capital gains distributions from a mutual fund) and qualified dividends received in 2015 in the following ways:
- For individuals that fall in the top income bracket, the top rate was raised from 15% to 20%.
- For individuals that fall in lower tax brackets, long-term capital gains and qualified dividends will continue to be taxed at 15% or 0%.
- Nonqualified dividends and short-term capital gains continue to be taxed at rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, depending on the level of taxable income.
- All dividends and capital gains beginning in 2013 could be subject to a new 3.8% Medicare surtax that would be added onto an individual’s regular income tax.
Please consult your tax advisor to see how these new income tax changes may affect you.
What actions can shareholders take to mitigate the tax liability on capital gains distributions?
Shareholders should consult their tax professionals to determine what course of action is most appropriate for their individual situations.
What steps does Wells Fargo Funds take to manage tax implications of portfolio transactions?
In conjunction with managing each fund to its respective investment objective and within its stated investment strategy, portfolio managers receive information relating to the current tax status of their funds’ holdings in order to assist them as they consider security transactions.
How will shareholders be notified of the estimated and actual capital gains distributions?
Wells Fargo Funds will post notification regarding projected distribution ranges to wellsfargofunds.com on Tueday, October 27, 2015.
Wells Fargo Funds will post notification regarding actual capital gains distribution amounts to wellsfargofunds.com on or around the ex-dividend date (December 9 or December 11, 2015, as listed on the tables on previous pages) for each fund.