Mutual Fund Liquidation Distributions

[MsTabbyKats]

I own a mutual fund (thru Fidelity) that was doing really bad and now they are liquidating the assets with cash distributions.

The owners can't sell the shares or I would have done that.

Anyway....aside from being annoyed, I was thinking that I won't be able to take this as a Schedule D loss.  They are going to report these distributions on a 1099 as "liquidation distributions", which I think would just make them "non-taxable" (as opposed to dividends).

Does anyone see a way to report this as a Schedule D event....or would that possibly happen after everything is liquidated (this will be over a couple of years).

[jklcpa]

Liquidating distributions that are reported on a 1099 are on a 1099-DIV, but those ARE payments (proceeds from redemption or liquidation) that are properly reported on Sch D as a capital transaction. You'll offset those payments received with your basis to arrive at your capital loss. The problem with these mutual funds that don't survive is that if the fund has some holdings that increased in value since their purchase, those will generate capital gains that the investors will still pay tax on yet not have the benefit of their increase in value other than to raise cash to buy the investors out.

[MsTabbyKats]

So, you are saying that the cash received are the proceeds that go on a D, and I just need to put in the basis to calculate the loss.  This makes sense, but, let's say the cash came from the sale of ABC stock.  They don't give you the cost of that security when you buy the fund so it's really impossible to do (unless I'm misunderstanding),

Probably the best way to do it is as a ratio of total cost vs value of the fund at the time of distribution

This was actually from my son's 2015 return, and I just checked the supplemental info that came with the1099-Div....it doesn't say anything about this fund other than the cash received.

Or, am I missing something?

[jklcpa]

Page 22 "Liquidating Distributions" section should answer your questions. Each time you read "stock" replace that with "mutual fund". You are dealing with basis of the mutual fund, not individual holdings held by the fund. 

Liquidating distributions are treated as a return of capital on SCH D each year, and if your son truly has an overall loss in this liquidation, the loss will ultimately be in the year he receives the final liquidating payment.

https://www.irs.gov/pub/irs-pdf/p550.pdf

Edited July 8, 2016 by jklcpa
added the link!

[MsTabbyKats]

Thanks....perfect

(Actually I read that link when I did his return.  But I had a senior moment yesterday and got to overthinking this.)