What Is a Capital Gains Distribution?

A capital gains distribution is a payment made by a mutual fund or an exchange-traded fund (ETF) representing a portion of the proceeds froꦺm the fund’s sales of stocks and other assets from within its portfolio. It’s the investor’s pro-rata share of the proceeds from the fund’s transactions.

It’s not a share of the fund’s overall profit, however. The fund may gain or lose money over a year and your balance will rise or fall accordingly. But🗹 the fund will make capital gains distributions to its shareholders if it gained from selling any of its stocks during that year.

Mutual funds are required by law to make regular capital gains distributions 🧜to their shareholders. The owners of mutual fund shares have the option to take the capital gains distribution in the form of immediate payments or to reinvest it in additional fund shares.

Understanding Capital Gains Distributions

A mutual fund or ETF generally distributes capital gains at the end of each year. The distribution represents the proceeds of the sales of stock or other assets by the fund’s managers throughout the tax year.

Cashing in on the 澳洲幸运5开奖号码历史查询:capital gains distribution rather than reinvesting it in the fund is effectively a withdrawal. It reduces the net amount you’ve invested ♔in the fund by the distribution amount.

Reinvesting Capital Gains

澳洲幸运5开奖号码历史查询:Reinvesting capital gains involves using the profits from selling an asset to purc🦄hase more assets. Doing s🦩o can affect the timing and amount of taxes owed.

Reinvesting capital gains doesn’t eliminate tax liability but can impact the timing and amount of taxes owed. The tax r🃏ate depends on how long the original asset was held and the investor’s income. If capital gains are reinvested in a tax-advantaged account, like an individual retirement account (IRA) or 401(k), the gains may grow tax-deferred until withdrawal. 

When capit๊al gains are reinvested, the distribution is added to 🥀the cost basis, which increases the number of shares owned and the cost basis for those shares.

One option is to reinvest capital gains into a rental or investment property. A 澳洲幸运5开奖号码历史查询:1031 exchange can be used to roll the proceeds from the sale of that property into a 澳洲幸运5开奖号码历史查询:like investment within 180 days.

Tax Consideration☂s of Capital Gains Distributi💞ons

Mutual fund share owners are required to 澳洲幸运5开奖号码历史查询:pay taxes on capita♔l gains distributions made by the funds they own regardless of whether the money is reinvested in addit🗹ional shares. There’s an exception for municipal bond funds, however, which are tax-exempt at the federal level and usually at the state level.

The taxes aren’t due for that tax year if the investor owns the🌼 fund as part of an IRA, 401(k), or other tax-deferred retirement plan. They’ll come due when the funds are withdrawn in retirement.

The taxes are due for that🔜 tax reporting period if the fund isn’t a retirement plan.

Current IRS Regulations

Capital gains distributions from mutual fund or ETF holdings are taxed as long-term capital gains under IRS regulations no matter how long the individual has owned shares of the fund. The long-term capital gains tax rate is 0%, 15%, or 20%, depending on the individual’s overall taxable ordinary income.

You might consider 澳洲幸运5开奖号码历史查询:tax-efficient investments, including tax-e🧸fficient funds if you really hate paying taxes. Tax-efficient funds identify themselves as such in their descriptions. They tend to buy and sell stocks less frequently than aggressive growth funds and may hold some municipal bond funds for tax-free incom𒁏e.

Capital gains distributions can be made even when a fund’s overall value has dropped during the year. A fund may have sold some appreciated stocks, but these gains might be 🐻offset or even erased by other investments that lost money.

Capital Gains Distributions and Net Asset Value

The distribution of capital gains and 澳洲幸运5开奖号码历史查询:dividends decreases a fund’s 澳洲幸运5开奖号码历史查询:net asset value (NAV) by th⛦e amount distributed. A fund manager with a net asset value of $20 per share might pay a $5 distribution to shareholders. This would result in the fund’s net asset value declining by $5 to $15 per share.

This appears on a mutual fund’s price chart as a decline in price on the 澳洲幸运5开奖号码历史查询:ex-dividend date, but the fund’s total return hasn’t changed. 澳洲幸运5开奖号码历史查询:Unrealized gains on securities determine the mutual fund’s net asset value unt🀅il they’re sold.

The Bottom Line

Investing in mutual or exchange-traded funds means you might receive a capital gains distribution regardless of whether you sold any shares. Be prepared to pay taxes on any capital gai𓆏ns distributions you receive.