Question: What is a capital gain distribution? I didn’t sell any shares of my mutual fund, but I received a year-end statement from the company reporting a capital gain distribution.
Answer: Typically mutual funds buy and sell stocks or bonds throughout the year. Each time the fund sells an investment, its owners owe tax on their share of any gain. At the end of each year, the mutual fund company reports the total gains to its owners for income tax reporting purposes.
Many investors are surprised to learn they owe tax when they didn’t receive any cash from the company. Instead of distributing the proceeds to you when an investment is sold, the fund manager reinvests the cash in another investment. However, you are still responsible for the tax.