Capital gains distribution

from investopedia: Distributions that are paid to a mutual fund's shareholders out of the capital gains of the company's investment portfolio.

Mutual fund capital gains distributions typically occur near the end of the calendar year and are taxable to the fund's shareholders.

This poses a problem for some mutual fund investors who make initial purchases of mutual funds near the end of a calendar year. Because they receive a capital gains distribution, they immediately receive taxable income and face a mutual fund NAV that is reduced from the distribution.

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 up to 35%. 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. 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. (These tax rates are mandated for 2008-2010.) They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.

Links

 * Fairmark: Capital Gains Distributions