Mutual Fund Short-Term Capital Gains Distributions

Short-Term Capital Gains vs. Short-Term Capital Gains Distributions

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Taxation is a complex topic, but the taxation of mutual fund short-term capital gains is one of the least understood topics when it comes to investing. Many people know about short-term capital gains but understanding short-term capital gains distributions of mutual funds can be much more difficult.

Here's what you should know about how mutual fund short-term capital gains are distributed.

Key Takeaways

  • Mutual fund shareholders can expect to receive capital gains distributions once a year. This often occurs in a lump sum at the end of the year.
  • You'll realize short-term capital gains if you hold the shares for one year or less. They'll be taxable at your ordinary income tax rate.
  • You'll realize long-term gains if you hold the shares for more than a year. This tax rate is generally more favorable.

What Are Mutual Fund Capital Gains Distributions?

Mutual fund shareholders face the prospect of receiving capital gains distributions from their mutual funds each year. They're the result of the mutual fund selling securities within the fund. A mutual fund might start out the year holding a stock like General Electric then, during the year, the fund manager may decide to sell those shares at a capital gain. They must pass those gains onto the shareholders when they do so.

This is most often done in lump sums at the end of the year. All the gains from all the sales throughout the year are distributed among shareholders in one payment.


You can avoid paying taxes on these distributions, at least temporarily. This can be done by holding mutual funds in a tax-deferred account, such as a 401(k), 403(b), or IRA.

Long-Term vs. Short-Term Capital Gains Distributions

Any gains as a result of that sale are considered "short-term capital gains" when a mutual fund sells shares it has owned for one year or less. They'll be distributed to shareholders as short-term capital gains. These are taxed at the same rate as ordinary income.

But what if a mutual fund sells shares that it's owned for more than 12 months? In that case, any gains as a result of the sale are classified as "long-term capital gains." They'll be distributed as long-term capital gains and subject to long-term capital gains taxes. These are more favorable than ordinary income tax rates.

Shareholders may face both long-term and short-term capital gains distributions. This is a result of owning shares in a particular mutual fund. It doesn't matter how long the fund has been held. The applicable time frame is based on the mutual fund's holding period for the securities within the mutual fund. It's not about how long the mutual fund's shareholder has held the mutual fund itself.

Short-Term Capital Gains Distributions

The difference between short-term capital gains and short-term capital gains distributions can be confusing. Let's say you own a mutual fund for a few months, then sell it for a gain. You've incurred a short-term capital gain in this case. What if the fund was held in a taxable account? The net result is a short-term gain if you don't have enough losses to offset this gain. You'll have to pay ordinary income tax rates on the amount of money you made as a result of the sale.

You gained from buying and selling shares in the mutual fund in this scenario. You can use any short-term gains you might realize against other capital losses to reduce your tax liability. But this isn't quite the case when it comes to short-term capital gains distributions from a mutual fund.

You must instead report them on your tax return as ordinary income if you own a mutual fund that subjects you to short-term capital gains distributions. Unlike short-term capital gains, capital losses don't offset short-term capital gains distributions and reduce your tax liability.


Short-term gains will be offset by any losses within the mutual fund, but these are controlled by the fund manager, not the individual investor.

The Bottom Line

This situation might quickly become a problem to the extent that you'd planned to reduce your tax bill by using tax loss harvesting strategies or investing in tax-efficient funds.

You might be unpleasantly surprised at tax time when you owe more in taxes than you had planned if you or your financial advisor believe that short-term capital gains distributions are just like short-term capital gains.

Frequently Asked Questions (FAQs)

What are the capital gains tax rates for long-term distributions?

Long-term capital gains are taxed at a rate of either 0%, 15%, or 20%. They're based on your overall taxable income and your filing status. The Internal Revenue Service (IRS) indicates that most individual taxpayers pay no more than 15%.

Are there any disadvantages to holding mutual funds in a 401(k), 403(b), or IRA?

You could have less access to your money if you place your investments in one of these retirement accounts and find yourself in a position where you have to take them out again because you need the money. You can take withdrawals from these accounts, but you could potentially be hit with a 10% tax penalty (on top of a capital gains tax) if you withdraw the funds and sell them, depending on your age and other factors.

The Balance does not provide tax or investment advice or financial services. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Office of Investor Education and Advocacy. "Mutual Funds."

  2. IRS. "Topic No. 409 Capital Gains and Losses."

  3. IRS. "Frequently Asked Questions/Mutual Funds (Costs, Distributions, Etc.)."

  4. Fidelity Investments. "How to Cut Investment Taxes."

  5. IRS: What If I Withdraw Money From My IRA?

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