My capital gain was reinvested, I did not collect any monies at all, Why does it shows on my 1099 -div. Why do i have to pay taxes on it?

The reason why you have to pay tax on this amount is the Mutual Fund made the dividend distribution available to you. As such, you had requested that all these dividends be reinvested into existing mutual funds. So, the Mutual Fund purchased additional units in your account to the extent of the dividends that were distributable to you.

In short, you have now increased your cost basis in the mutual fund. The tax impact is that for the current year you have a 1099-Div equal to the dividend declared. Thus, despite you have a tax liability on the amount of the 1099-Div, you have not received any monies from the mutual fund company.

Now, when lets examine what happens when you sell your Mutual Funds, and determine the gain which is computed as follows;

Gain or Loss = Sale price less the Cost basis

Gain or Loss =Sale price less {original purchase price +sum(all dividends reinvested over the years)

Thus, your gain (or loss), would be reduced to the extent of all dividends that were reinvested over the years. There is no double taxation!

This taxation approach is consistent with the philosophy of "constructive receipt" where the taxpayer had the option of receiving the payment in cash but chose not to receive it, and instead in your case reinvested these as additional units of mutual funds.

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