Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

The statement regarding mutual fund taxation that is true emphasizes that dividends and capital gains are taxed in the year they occur. This is aligned with how the taxation of mutual funds operates under U.S. tax law.

When mutual funds distribute dividends to their shareholders, those dividends are considered taxable income for the year in which they are received, regardless of whether the investor chooses to reinvest those dividends back into the fund. Similarly, if the fund realizes capital gains from the sale of its assets over the course of the year, those gains are also distributed to shareholders and are subject to taxation in that year.

This understanding is critical for investors as it influences their taxable income and financial planning. Recognizing the timing of these tax obligations helps individuals anticipate their tax liabilities and plan accordingly to manage their investment strategies effectively.

In contrast, the other options presented misrepresent the nuances of mutual fund taxation. For example, dividends are not deferred until withdrawal, capital gains are not free from taxation, and while taxes cannot be avoided through reinvestment, they are still applicable in the year the respective income is generated.