Capital Gains Distribution

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DEFINITION of 'Capital Gains Distribution'

The payment of proceeds prompted by a fund manager's liquidation of underlying stocks and securities in a mutual fund. Capital gains distribution occurs when a mutual fund manager liquidates underlying positions that have made gains since they were added to the fund. Capital gains distributions will be taxed as capital gains to the person receiving the distribution.

BREAKING DOWN 'Capital Gains Distribution'

Holders of mutual fund shares will be required to pay capital gains tax on any capital gains distributions made by the funds they own. Before 1986, all mutual fund shareholders were charged long-term capital gains on distributions, regardless of how long they'd held the funds. With the passing of the 1986 Tax Reform Act, shareholders now pay long- or short-term capital gains tax based on the time they've owned the fund.

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