Bobby opened an account with the PDG mutual fund in October, with an initial deposit of $10,000. In December, he receives a capital gains distribution from the fund. How will this distribution be taxed?
A) At the long-term gains rate.
B) There will be no taxes due to the investor since he is reinvesting.
C) As ordinary income, since he has not owned shares of the fund for the required holding period
D) As a short-term gain, since he has held the shares for less than 6 months
The correct answer is a)
The mutual fund is passing through part of a gain that it earned by holding securities for the required year-and-a-day or more. Regardless of the individual’s period of holding the mutual fund’s shares, these distributions are taxed at the long-term rate.