Mutual Fund Capital Gains Distributions 2025

Given the growth in the stock market throughout 2025, you may receive larger capital gain distributions than usual. It's important to understand what this means for you, and how it might impact your tax return.

What are capital gain distributions?

Capital gain distributions are distributions of net gains from sales made within a mutual fund. Just like you can make trades in your own investment accounts, fund managers can also place trades within the fund itself. While these sales may take place throughout the year, the profits are generally distributed to investors near year-end.

If you own shares of the mutual fund on its record date, you'll receive the capital gain distribution even if you've only owned the fund for a day. This is why you could have capital gains in years when you didn't personally make trades or your portfolio declined. Mutual funds will publish their capital gain distributions, record date, and holding period in advance, typically in November or December.

How do capital gain distributions affect my tax return?

If the mutual fund is owned in a taxable account, the distributions are taxable in the year received even if you reinvest them. Conversely, if the mutual fund is held in a tax-advantaged account, such as a 401(k), IRA or HSA, the distributions have no impact on your current-year tax return.

Similar to other investments you sell, capital gain distributions can be short-term and taxed at your marginal tax rate or long-term and taxed at your capital gains tax rate. However, their holding period is based on how long the fund owned the underlying investment, not how long you owned the mutual fund. This means you could end up with a short-term capital gain distribution from a fund you've held for more than a year.

Additionally, if your income is high enough, those gains are also subject to the 3.8% net investment income tax.

How can I manage capital gain distributions?

If you already own mutual funds within your taxable account, consider the following strategies to potentially help reduce capital gains taxes:

• Tax-loss harvesting: If you own positions with unrealized losses, consider recognizing capital losses to reduce the tax burden of your gains. While you can't use this approach for short-term capital gain distributions, you can offset other capital gains, including long-term capital gain distributions.
• Selling considerations: In certain circumstances, it may make sense to exchange or sell your mutual fund shares ahead of the record date to avoid the capital gain distribution, such as when you're holding the mutual fund at a loss or at a much smaller gain than the capital gain distribution.

If you're considering new purchases within your taxable accounts before year-end:

• Buying considerations: You may want to wait until after the record date to avoid the capital gain distribution, depending on your tax situation and the size of the capital gain distribution. You could also consider a more tax-efficient investment such as a tax-sensitive mutual fund or an ETF.

Meet with a financial advisor to understand your capital gain distributions

Since tax planning alone shouldn't dictate your investment planning, managing your capital gain distributions can be complex. That's why it's so important to discuss with your financial advisor and tax professional – they can help you understand how you'll be impacted by capital gain distributions and what your best course of action may be.