Capital gains distribution
A capital gains distribution occurs when mutual funds, closed-end funds, and exchange-traded funds (ETFs) distribute the capital gains realized in their investment portfolios to shareholders.
If you hold funds in taxable accounts, these distributions are taxable. Your tax rate depends on how long the fund has held the investment, and also on your own marginal tax rate. The two types of distributions from stock and bond funds are termed short-term gains and long-term gains.[note 1]
- Short-term capital gains distributions are from gains realized on securities the fund held for one year or less. You pay tax on short-term gains at ordinary income tax rates. Funds usually include short-term gain distributions in their ordinary dividend distribution. This means that you cannot use capital losses to offset your tax on these distributions.
- Long-term capital gains distributions are from gains realized on securities the fund held for more than one year. You report these on your tax return's Schedule D, along with any other capital gains, and you can reduce them with capital losses.
Typically, funds distribute capital gains near the end of the year, often in December. If you hold funds in taxable accounts, it is usually best to invest in new funds after a fund has distributed any capital gains. This avoids an unnecessary tax liability.
See also
Notes
- ↑ Special tax considerations apply to commodity asset classes and fund structures:
- Precious metals and grantor's trusts: the IRS considers precious metals to be collectibles.
- Commodity futures are subject to a 60/40 long term/short term blended tax obligation. 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 marginal long term capital gains rate or marginal short term income tax rate.[1]
External links
- Capital Gains Distributions from Fairmark
- Topic No. 409, Capital Gains and Losses, from the IRS
References
- ↑ "The Complete Guide to ETF Taxation" (PDF). indexuniverse.com. November 2011. Retrieved October 31, 2023.