Dividends Mutual Fund Dividends Mutual funds can pay four different types of dividends and make two different types of allocations. Here's the starting point for learning to deal with all these items. But short-term capital gains pass through as ordinary income. Capital Gain Allocations Mutual funds can also allocate capital gains to their shareholders without actually paying them out. You also get a basis adjustment.
Some mutual funds pay a different type of tax-free dividend, called a return of capital dividend.
These dividends affect the basis of your mutual fund shares. This page explains how to use that item to reduce your income tax. This page begins the explanation of how to handle sales of mutual fund shares. Basis of Particular Shares How to determine your basis in particular mutual fund shares. This is the simplest averaging method, but also the least flexible.