LR 8397
Capital Losses & Certain Mutual Fund Distributions Ineligible for Capital Gains Subtraction
May 28, 2026
Salutation:
This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter April 3, 2026.
The facts as presented in your letter ruling request are summarized as follows:
Applicant filed a Form MO-1040 for tax year 2025, subtracting only net capital gains reported on Federal Form 1040, Line 7a as directed by the Department's instructions for Form MO-A, Line 18. These net capital gains were arrived at after reduction for $X in capital loss(es). These net capital gains also did not include $Y in what the Applicant describes as short-term capital gains from mutual fund distributions. The relevant Form MO-1040 instruction states:
The state of Missouri allows a subtraction from your federal adjusted gross income for 100 percent of your federally reported capital gains. Enter the amount of capital gains reported on your Federal Form 1040 or 1040-SR, Line 7a. This amount must have been included in figuring your federal adjusted gross income. Attach your Federal Form 1040 or Federal Form 1040-SR along with any applicable schedules.
Applicant does not agree that Federal Form 1040, Line 7a will always provide the correct number to include in the subtraction for the Form MO-A, Line 18. Applicant notes that capital losses are netted with gains in Federal Form 1040, Line 7a. Applicant believes that an adjustment would be needed to increase the amount on Federal Form 1040, Line 7a to arrive at capital gains without reduction for capital losses. Applicant also believes that mutual fund distributions of short-term capital gains included on Federal Form 1040, Line 3b should be included in the Missouri Capital Gain Subtraction. Applicant presents secondary issues regarding the 'unit of account' for subtraction of capital gains to be addressed if the Department agrees with the Applicant's positions.
ISSUE 1:
Whether Applicant may increase Applicant's Tax Year 2025 Missouri Capital Gains Subtraction by $X to remove the effect of the netting of capital loss(es) against capital gain(s) in arriving at Federal Form 1040, Line 7a.
RESPONSE 1:
No. Applicant may not increase Applicant's Tax Year 2025 Missouri Capital Gains Subtraction by $X to remove the effect of the netting of capital loss(es) against capital gain(s) in arriving at Federal Form 1040, Line 7a.
Under Sections 143.121.3 and 143.121.3(14)(a), RSMo (with emphasis added in the below):
There shall be subtracted from taxpayer's federal adjusted gross income the following amounts to the extent included in federal adjusted gross income [...] For all tax years beginning on or after January 1, 2025, one hundred percent of all income reported as a capital gain for federal income tax purposes by an individual subject to tax pursuant to section 143.011.
Although the Missouri Capital Gains Subtraction allows a subtraction for "one hundred percent of all income reported as a capital gain for federal income tax[,]" that amount is only allowed "to the extent included in federal adjusted gross income[.]" Before they are included in federal adjusted gross income, capital gains are netted against capital losses. Therefore, one hundred percent of all income reported as a capital gain for federal income tax purposes, to the extent included in federal adjusted gross income, requires that capital gains be netted against capital losses. It is only these capital gains, after netting, that would be "included in federal adjusted gross income[,]" and so only these capital gains, after netting, that are eligible for the Missouri Capital Gains Subtraction.
The alternative position would result in a duplicated state tax benefit. First, capital losses would decrease an individual's Missouri taxable income by reducing the capital gains that are included in the starting point of calculating that Missouri taxable income: federal adjusted gross income (although not below zero). Second, the Missouri Capital Gains Subtraction would, on this erroneous view, be increased by the amount of those same capital losses in order to further decrease Missouri taxable income. To the extent there is any ambiguity on this point in Sections 143.121.3 and 143.121.3(14)(a), RSMo, that ambiguity should be interpreted against the expansion of the Missouri Capital Gains Subtraction.
ISSUE 2:
Whether Applicant may increase Applicant's Tax Year 2025 Missouri Capital Gains Subtraction by $Y to account for distributions of short-term capital gains from mutual funds which were reported on Tax Year 2025 Federal Form 1040, Line 3b rather than Tax Year 2025 Federal Form 1040, Line 7a?
RESPONSE 2:
No. Applicant may not increase Applicant's Tax Year 2025 Missouri Capital Gains Subtraction by $Y to account for distributions of short-term capital gains from mutual funds which were reported on Tax Year 2025 Federal Form 1040, Line 3b rather than Tax Year 2025 Federal Form 1040, Line 7a.
A mutual fund is fundamentally a corporation. It is not a pure pass-through entity like a partnership, but is instead better described as a "quasi-pass-through entity." The amount referred to by Applicant does not represent the short-term capital gains of an individual, but instead - at least for purposes of Section 143.121.3(14), RSMo - reflects dividends paid from a corporation to a shareholder. The dividends just so happen to have resulted from short-term capital gain(s) of the mutual fund. Unlike the situation of a partner in a partnership, the capital gain character of these items does not flow through to the mutual fund investor. Again, to the extent there is any ambiguity on this point in Sections 143.121.3 and 143.121.3(14)(a), RSMo, that ambiguity should be interpreted against the expansion of the Missouri Capital Gains Subtraction.
Importantly, the distributions involved in Applicant's question are not "capital gain dividends.' 'Capital gain dividends' are treated as capital gains in the hands of the mutual fund shareholder. 'Capital gain dividends' cannot properly be reported on Tax Year 2025 Federal Form 1040, Line 3b. By contrast, a mutual fund's distribution of its short-term capital gains must be reported as ordinary dividends for federal income tax purposes. Only income reported as a capital gain for federal income tax purposes, to the extent included in federal adjusted gross income, qualifies for the Missouri Capital Gains Subtraction.
Given the foregoing responses, Applicant's remaining requests are denied as moot.
This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, an applicant who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.
Should additional information be needed, please contact Legal Counsel II, Vickie Adiele, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, or email at Vickie.Adiele@dor.mo.gov.
Sincerely,
Trish Vincent