Capital gains distribution

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.


 * 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.

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.

Capital gain rates for 2018 and beyond
For the tax year 2018, 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, rates are described at the bottom of the first table below.

The taxation of long term capital gains also changes beginning in 2018. Rates for qualified dividends are listed in the second table below. Note that the long-term capital gain rates do not align with the ordinary income tax rates ("tax brackets") shown in the first table.

Capital gain rates prior to 2018
For the tax years 2013 through 2017, short-term gains are taxed at ordinary income tax rates up to 37%. For taxpayer's subject to the Net Investment Income (NII) tax, a 3.8% surtax for taxpayers whose adjusted gross income surpasses threshold limits, the maximum tax rate increased to 43.4%.

Beginning in 2013, the taxation of long term capital gains also changed. Long-term gains are taxed at 0% for income which would be in the 10% and 15% tax brackets, and at 15% for income which would in be the 25%, 28%, 33%, and 35% tax brackets. For income which would be 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 increased 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 all taxpayers in the 35% and 39.6% marginal tax brackets.

Below is a summary of previous capital gain rates.