Capital gains distribution

Mutual funds, closed-end funds, and exchange traded funds frequently make distributions to shareholders from the capital gains realized in their investment portfolios. Such a distribution is called a capital gains distribution. 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.


 * 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 2008-2012.) They are reported on tax Schedule D along with any other capital gains, and can be reduced by capital losses.

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.