Capital gains distribution

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A capital gains distribution occurs when mutual funds, closed-end funds, and exchange-traded funds (ETFs) make distributions to shareholders from the capital gains realized in their investment portfolios. For investors holding funds in taxable accounts, these distributions are taxable, the rate of taxation dependent on how long the fund has held the investment and the individual taxpayer's marginal tax rate. The two types of distributions that apply to stock and bond funds are termed short-term gains and long-term gains. [footnotes 1]

  • Short-term capital gains distributions are made from realized gains on securities held for one year or less. Short-term gains are taxed at ordinary income tax rates Short-term gain distributions are included in a fund's ordinary dividend distribution; therefore, capital losses may not be subtracted from these distributions when computing taxes.
  • Long-term capital gains distributions are made from realized gains on securities held for more than one year. They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.

Tax rates in 2012

For the tax year 2012, short-term gains are taxed at ordinary income tax rates up to 35%.

Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets and at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets.

Tax rates in 2013 and beyond

For the tax year 2013, and for subsequent years, short-term gains are taxed at ordinary income tax rates up to 39.6%. For taxpayer's subject to the Net Investment Income (NII) tax, a 3.8% surtax for taxpayers whose adjusted gross income surpasses threshold limits,[footnotes 2] the maximum tax rate will increase to 43.4%.

The taxation of long term capital gains also changes beginning in 2013. Long-term gains are taxed at 0% for taxpayers in the 10% and 15% tax brackets and at 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets. For tax payers in the 39.6% marginal tax bracket, the capital gains tax is 20%. For taxpayers subject to the Net Investment Income (NII) tax, the capital gains tax increases to 18.8% and 23.8%.

The NNI tax threshold levels begin to effect taxpayers whose adjusted gross income falls in the 33% marginal tax bracket, and affects taxpayer's in the 35% and 39.6% marginal tax brackets.

Federal Capital Gains and Dividend Taxation in the United States from 2008 forward[1]
2008 - 2012 2013 -
Ordinary Income Tax Rate Short-term Capital Gains
Tax Rate
Long-term Capital Gains
Tax Rate
Ordinary Dividends
Tax Rate
Qualified Dividends
Tax Rate
Ordinary Income Tax Rate Short-term Capital Gains
Tax Rate
Long-term Capital Gains
Tax Rate
Ordinary Dividends
Tax Rate
Qualified Dividends
Tax Rate
Ordinary Dividends/Short-term gains with NII tax
Tax Rate
Qualified Dividends/Capital gains with NII tax
Tax Rate
10% 10% 0% 10% 0% 10% 10% 0% 10% 0%
15% 15% 0% 15% 0% 15% 15% 0% 15% 0%
25% 25% 15% 25% 15% 25% 25% 15% 25% 15%
28% 28% 15% 28% 15% 28% 28% 15% 28% 15%
33% 33% 15% 33% 15% 33% 33% 15% 33% 15% 36.8% 18.8%
35% 35% 15% 35% 15% 35% 35% 15% 35% 15% 38.8% 18.8%
39.6% 39.6% 20% 39.6% 20% 43.4% 23.8%


Typically, funds distribute capital gains near the end of the year in December. Investors holding funds in taxable accounts are usually advised to invest new funds after a fund has made its capital gains distribution. This avoids the needless purchase of a tax liability.

See also

Notes

  1. Special tax considerations are also applicable to commodity asset classes and fund structures:
    • Precious metals and grantor's trusts: the IRS considers precious metals to be collectibles. Thus, precious metal ETF's, as well as bullion, are subject to a maximum 28% long term capital gains tax rate and a maximum short term 39.6% tax rate.
    • Commodity futures are subject to a 60/40 long term/short term blended tax obligation. Thus they have a maximum 23% long term capital gains tax rate and a maximum 23% short term maximum tax rate. Limited partnership ETFs are considered pass-through investments. Each year gains are marked-to-market and passed through to investors as a potential taxable obligation regardless of whether the shares are sold or held.
    • Exchange traded notes based on equity investments are subject to a 15% or 20% long term capital gains rate, depending on marginal tax rate, and a maximum 39.6% short term capital gains rate.

      Source:The Complete Guide to ETF Taxation, indexuniverse.com, (November, 2011)</span>

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  2. The threshold amounts are $250,000 for married filing jointly/ surviving spouse with dependents; $200,000 for single/head of household; and $125,000 for married filing separately. The threshold amounts are not indexed to inflation.
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References

  1. Federal Capital Gains Tax Rates, 1988-2011

External links