Basically, if you receive a qualified dividend from a mutual fund but you do not hold the shares of that fund for the required 61 days, then those dividends become non-qualified, despite the fact that your 1099-DIV will report them as qualified.
Here’s an example from IRS Pub 550 https://www.irs.gov/publications/p550:
This means that a mutual fund that owns a stock that pays a dividend to the fund must meet the 61-day test for its holding period of the stock. At that point, the fund has received a qualified dividend that it will pass on to the shareholders as a qualified dividend. (I understood that much before) But the shareholders must also meet the 61-day holding period for the mutual fund shares - or else the dividend becomes non-qualified. This latter part was news to me.You bought 10,000 shares of ABC Mutual Fund common stock on July 5, 2016. ABC Mutual Fund paid a cash dividend of 10 cents per share. The ex-dividend date was July 12, 2016. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 8, 2016. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.
So my questions to the group:
1. Have you heard of this rule?
2. Is this something you pay attention to when doing taxes? (Yes, I know - buy-and-hold mostly gets you around this being a concern)