Capital gains distribution

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Capital gains distribution

A distribution to the shareholders of a mutual fund out of profits from selling stocks or bonds, that is subject to capital gains taxes for the shareholders.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Capital Gains Distribution

An amount of money paid to shareholders of a mutual fund from its capital gains over the course of a year. That is, a mutual fund takes its capital gains over a year and divides them among shareholders, who are then responsible for capital gains taxes. Capital gains distributions are usually made at the end of each calendar year and they reduce the fund's net asset value. Because of the existence of capital gains distributions, some analysts advise against purchasing mutual funds at the end of a calendar year because a shareholder will become instantly liable for capital gains taxes.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

capital gains distribution

Payments to investment company shareholders based on gains from securities in the firm's portfolio that have been sold. These gains are passed through to the shareholders and are taxed to the shareholders. Distributions usually occur once each year.
Case Study Capital gains distributions can produce unexpected tax problems for mutual fund shareholders, especially investors who acquire mutual fund shares following a major increase in stock values. An even greater surprise occurs when a large distribution occurs during a year of poor market performance. Mutual funds are required to distribute to their shareholders all of the net gains the funds realize through the sale of securities. Unfortunately for some investors, gains that occur during one period are realized and distributed in a subsequent period. Buy a mutual fund following a major increase in stock values and you are likely to receive distributions on gains from which you did not benefit. In 2000 Warburg Pincus Asset Management made a capital gains distribution equal to a stunning 55% of assets to the shareholders of its Warburg Pincus Japan Small Company Fund. The distribution was occasioned by a year of spectacular gains in 1999 (a return of 329%) followed by a year of poor performance with resulting shareholder redemptions that forced portfolio managers to sell stocks to raise cash. Stock sales by the fund produced capital gains that triggered the distribution by Warburg Pincus. Although mutual funds typically make distributions during the end of the calendar year, Warburg Pincus officials indicated their distribution was made early in the year to allow shareholders time to take care of any tax liability. In a similar event, in December 2000 Select Software and Computer Services Fund distributed nearly 40% of its net asset value even though the fund was down over 9% for the year. Investors who purchased shares in the fund in early 2000 received a large taxable distribution even though their shares had lost market value during the year. Woe to the investor who fails to research a mutual fund purchase.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

Capital gains distribution.

When mutual fund companies sell investments that have increased in value, the profits, or capital gains, are passed on to their shareholders as capital gains distributions.

These distributions are made on a regular schedule, often at the end of the year and are taxable at your regular rate unless the funds are held in a tax-deferred or tax-free account.

Most funds offer the option of automatically reinvesting all or part of your capital gains distributions to buy more shares.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
That list includes capital gains distributions and payouts that are really interest income.
Income and capital gains distributions account for most taxable events.
During rising markets, these funds can make capital gains distributions that are taxable to the funds shareholders.
Any interest, dividend or capital gains distributions of assets held in taxable accounts are taxed, whether they're spent or reinvested.
The board of directors of Swiss Helvetia Fund Inc (NYSE:SWZ) approved a total distribution of USD0.206 per share that comprises short-term capital gains distributions of USD0.021 and long-term capital gains of USD0.185 per share.
With the duration of the bull market, capital gains distributions are growing in many mutual funds.
EXCHANGE-TRADED funds are often regarded as more tax efficient than traditional mutual funds largely due to the fact that many ETFs have avoided the annual capital gains distributions that often frustrate investors in traditional mutual funds.
As a result of the tax treatment of the in-kind transfer process utilized in the creation of ETF units, many ETFs rarely make capital gains distributions. Investors may therefore exercise much more control over the realization of taxable capital gains when holding ETFs than with traditional mutual funds.
REIT capital gains eligible for the reduced rate are capital gains on the sale of REIT stock and REIT capital gains distributions. When the provision expires, capital gains rates will revert to 20 percent.
However, ETFs can and do make capital gains distributions. These usually result when the ETF must buy and sell stocks to adjust for changes in its underlying benchmark (the index the ETF tracks).