formfill1

I'm about to fill in my first 1040NR form.
I've read that short-term mutual fund capital gains are not taxed, but that the companies lable these as dividends.

How do I find out which dividends are actually short-term capital gains?

Is it that the short-term are those that are distributed during the year, and the long term are those I sell myself after owning them for more than a year?

Owen778

Welcome to BE.

I don't know where you read that.

Short-term capital gains are taxed at income tax rates. Long-term capital gains are taxed at lower long-term capital gains rates. Qualified dividends (most US-based dividends but not all) are generally taxed at long-term capital gains rates, and non-qualified dividends are taxed at income tax rates.

Assuming this is US-sourced income, you should have a 1099 form or forms of various types from your brokerage that will specify what type of income it is.

Edit: Short-term capital gains are those from gains after holding the asset for less than a year.

nun

Do you have a 1099-DIV? Where are your mutual funds held? What is your residency and citizenship?

formfill1

I found the information initially on a web site.
This gave the information from my original post, but said that this changed for 2010.
I then saw an IRS document saying that mutual fund short-term gains were exempt from 2014 onwards.
I have a 1099 form that has just two entries, both of the same value, under headings of Dividend, and Qualified dividend if I remember correctly.
I'm UK citizen and resident with funds in the US.

nun

OK have you filed a W-8BEN? and claimed the tax treaty dividend tax rate?

You will need to file a 1040NR and pay US tax in the correct proportion. Then depending on your amount of foreign dividends you will need to file a UK self assessment and pay the UK tax......however, if the US mutual funds and UK non reporting you will have to pay the tax on the dividends at your marginal income tax rate.

Generally speaking if you are a UK resident and hold US investments outside of a pension fund wrapper you want to make sure they are single stocks or UK reporting funds and that the do not have capital gains distributions.

There is a useful example of how to pay cross border dividend tax here on page 103....good luck.


https://www.treasury.gov/resource-ce...ts/teus-uk.pdf

formfill1

Thanks for all this information.
However, isn't the issue about short-term capital gains an important one - why would you want to pay tax on dividends that are non-taxable?

durham_lad

Short term gains are treated the same as non-qualified dividends in that they are taxed just like regular income and interest from savings accounts.

I would ignore what you read and believe what is on your 1099 because the company that issued that knows what is taxable.

You normally have 2 figures on a 1099-DIV, one showing total dividends paid out, the other showing how much of those dividends is qualified for a lower tax rate. If the 2 numbers are the same it means that all the dividends paid out qualify for the lower tax rate.

nun

If you are a UK resident then you can can use the treaty to avoid US capital gains tax on US stocks and mutual funds. However, if your 1099-DIV only shows dividend distributions then you will have to pay US dividend tax at the tax treaty rate. You can't argue with a 1099-DIV.

Cook_County

But you may owe UK income on US capital gains distributions. Are the US mutual funds registered with HMRC, so that you avoid OIGs on sale?

nun

Yes, the UK reporting status is doing to dictate how the "dividends" are taxed by HMRC and the OP will need to apply foreign tax credits.

formfill1

My original information was as follows:

An issue with shortterm capital gains is that mutualfund
companies like to report them as dividends (not as gains).
This manner of reporting exists for the benefit of US resident taxpayers. This is why a special
provision exists in IRS Pub 519 to allow nonresidents
to treat those distributions as a capital gain, and thereby avoid paying tax on
them.

This was from:
investfaq com articles taxnonusnat (links not published)

And in Pub 519, I found:

Interest-related dividends and short-term
capital gain dividends received from mutual
funds. The exemption from withholding on certain
interest-related dividends and short-term
capital gain dividends paid by a mutual fund or
other regulated investment company, which
was scheduled to expire at the end of 2014, has
been extended permanently for tax years beginning
after December 31, 2014

Cook_County

Why does any of this matter if the UK tax will be higher than the US tax?

nun

Even if you can convince the IRS and HMRC to classify ordinary dividends as short term capital gains you are still going to pay tax on them to HMRC.....and if the fund is UK non reporting you'll pay at your marginal income tax rate.

If the US tax would be higher than the UK tax by paying on "dividends" then there might be some utility in all this.

durham_lad

The fact that mutual funds are not HMRC reporting funds means HMRC has no verifiable information on what is going on inside the funds so I doubt you will have much luck convincing them that some of the dividends they produce should be reclassified as short term capital gains for HMRC purposes.

nun

If the OP can convince IRS to see the ordinary dividends as capital gains then US tax can be avoided, but HMRC will still clobber them for tax if they are non-reporting. If the OP owns US Vanguard ETFs that are UK reporting then he/she will be able to use UK capital gains tax allowances.