Mutual Fund Capital Gains Distributions: Short Term vs Long Term

Differences Between Short-term and Long-term Capital Gains Distributions

taxes and investing
Learn more about mutual fund capital gains distributions. Getty Images

If you are knowledgeable of mutual fund capital gains distributions, count yourself in the minority among the investment community. Do you know the differences between short-term and long-term capital gains distributions? Here's what to know:

What Are Mutual Fund Capital Gains Distributions?

Mutual fund capital gains distributions are distributions of gains from the mutual fund to the mutual fund shareholders.

The gains are a result of the mutual fund selling shares of holdings at prices higher than the fund manager purchased them. Therefore a capital gain is produced. Mutual funds are required to pass along at least 95% of their capital gains to shareholders.

While capital gains sound good, they're not so good when you hold mutual funds in a taxable account and the distributions produce capital gains taxes!

Therefore, even if the mutual fund shareholder doesn't sell shares of the actual fund, the mutual fund's trading activity can still produce taxable gains.

The Difference Between Short-Term and Long-Term Gains Distributions

The simple difference between short-term capital gains distributions and long-term gains distributions is that the short-term gains are from sales of securities within 12 months of their purchase and the long-term variety are those of 12 months or longer. Therefore this distinction between the definition of short-term and long-term, as it pertains to taxable gains, is the same as short-term capital gains and long-term capital gains on individual securities.

The key points to remember are that capital gains distributions, whether they are short-term or long-term, are results of the mutual fund's activities, not yours.

Also a key distinction is in regard to short-term capital gains distributions: They can't be offset by short-term capital losses!

If all this sounds confusing, one thing that can be easy to remember is that a good way to minimize taxes is by investing in index funds.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.