Investment 
Income and 
Expenses

Publication 564, Mutual Fund Distributions, has been incorporated into this publication.

Underpayments of tax due to an undisclosed foreign financial asset are now subject to a 40% penalty for tax years beginning after March 18, 2010. Underpayments due to a transaction lacking economic substance after March 30, 2010, are now subject to a 20% penalty but may be subject to a 40% penalty in some cases. See Accuracy-related penalties in chapter 2.

Beginning in 2010, you will not be taxed for certain trades involving life insurance contracts. See Insurance Policies and Annuities under Nontaxable Trades in chapter 4.

For tax years beginning after July 21, 2010, a section 1256 contract does not include certain swaps. See Exceptions under Section 1256 Contract in chapter 4 for more information.

You may be able to exclude from income up to 100% of your gain from the sale or trade of qualified small business stock acquired from September 27 to December 31, 2010, if you hold the stock for more than 5 years. See Section 1202 Exclusion in chapter 4.

Penalties for failure to disclose a reportable transaction on a tax return have changed. See Penalty for failure to disclose a reportable transaction in chapter 2.

If you acquire a U.S. real property interest from a foreign person or firm, you may have to withhold income tax on the amount you pay for the property (including cash, the fair market value of other property, and any assumed liability). Domestic or foreign corporations, partnerships, trusts, and estates may also have to withhold on certain distributions and other transactions involving U.S. real property interests. If you fail to withhold, you may be held liable for the tax, penalties that apply, and interest. For more information, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

If you are a U.S. citizen with investment income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

If you received an option to buy or sell stock or other property as payment for your services, see Publication 525, Taxable and Nontaxable Income, for the special tax rules that apply.

If you are a nonresident or resident alien and do not have and are not eligible to get a social security number (SSN) and you are required for U.S. tax purposes to have a U.S. taxpayer identification number, you must apply for an ITIN. For details on how to do so, see Form W-7, Application for IRS Individual Taxpayer Identification Number, and its instructions. If you already have an ITIN, enter it wherever an SSN is requested on your tax return.

An ITIN is for tax use only. It does not entitle you to social security benefits or change your employment or immigration status under U.S. law.

You must complete Part III of Schedule B (Form 1040A or 1040) if you:

• Had a foreign account, or
• Received a distribution from, or were a grantor of, or a transferor to, a foreign trust.

Investments in District of Columbia Enterprise Zone (DC Zone) assets acquired after 1997 and before 2012 and held more than 5 years will qualify for a special tax benefit. If you sell or trade a DC Zone asset at a gain, you may be able to exclude the qualified capital gain from your gross income. This exclusion applies to an interest in, or property of, certain businesses operating in the District of Columbia. For more information about the exclusion, see the Schedule D instructions. For more information about DC Zone assets, see section 1400B of the Internal Revenue Code.

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

This publication provides information on the tax treatment of investment income and expenses. It includes information on the tax treatment of investment income and expenses for individual shareholders of mutual funds or other regulated investment companies, such as money market funds. It explains what investment income is taxable and what investment expenses are deductible. It explains when and how to show these items on your tax return. It also explains how to determine and report gains and losses on the disposition of investment property and provides information on property trades and tax shelters.

This generally includes interest, dividends, capital gains, and other types of distributions including mutual fund distributions.

These include interest paid or incurred to acquire investment property and expenses to manage or collect income from investment property.

The rules in this publication do not apply to mutual fund shares held in individual retirement arrangements (IRAs), section 401(k) plans, and other qualified retirement plans. The value of the mutual fund shares and earnings allocated to you are included in your retirement plan assets and stay tax free generally until the plan distributes them to you. The tax rules that apply to retirement plan distributions are explained in the following publications.

• Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
• Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans).
• Publication 575, Pension and Annuity Income.
• Publication 590, Individual Retirement Arrangements (IRAs).
• Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.

We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:

Internal Revenue Service 
Individual Forms and Publications Branch 
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Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.

Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.

Internal Revenue Service 
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If you have a tax question, check the information available on IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the addresses listed earlier.