HR2089-119

What This Bill Does

The Generating Retirement Ownership through Long-Term Holding Act creates Internal Revenue Code section 1046 for reinvested capital gain dividends from regulated investment companies such as mutual funds. Individuals do not recognize gain when a capital gain dividend is automatically reinvested in additional shares under a dividend reinvestment plan. The deferred gain is not forgiven: it is recognized proportionally when the shareholder later sells or redeems shares, and any remaining unrecognized gain is generally recognized on the individual's death and included in gross income for that final taxable year. Shares acquired through the reinvestment are treated as held for one year and one day on acquisition. The rule does not apply to individuals who can be claimed as dependents by another taxpayer, estates, or trusts. Treasury receives regulatory authority, and the amendments apply to taxable years ending after enactment.

Who Benefits and How

Individual mutual fund shareholders benefit because automatic reinvestment of capital gain dividends no longer creates immediate taxable gain. Long-term retail investors benefit from tax deferral if they keep reinvested regulated investment company shares. Regulated investment companies benefit because dividend reinvestment plans become more attractive to taxable individual investors. Brokerage platforms benefit from clearer tax treatment for automatic reinvestment programs.

Who Bears the Burden and How

The IRS must administer deferred-gain tracking, sale and redemption recognition, death-year inclusion, and dependent taxpayer exclusions. Tax preparers must track cumulative unrecognized capital gain dividends and proportional recognition on later share dispositions. Federal taxpayers bear timing-related revenue loss from deferring capital gain recognition. Investors and brokers must maintain records of reinvested dividends and deferred gain until sale, redemption, or death.

Key Provisions

• Creates section 1046 nonrecognition for automatically reinvested regulated investment company capital gain dividends.
• Requires deferred gain recognition on later sale or redemption of shares.
• Requires remaining deferred gain recognition on the shareholder's death unless regulations provide otherwise.
• Provides a one-year-and-one-day holding period for shares acquired through qualifying reinvestment.
• Bars the deferral for dependents, estates, and trusts.