Suppose that an ETF (that holds stock) sells a stock at a profit. It is my understanding that profit must be distributed to the share holders as the form of a dividend. Once distributed, it would normally be taxed. Do I have this right? I would expect the same to be true if we are talking about an (open ended) mutual fund. Do I have that right?

I am in the United States

1 Answer 1


Yes, you have it right.

Both traditional mutual funds and ETFs pass on the capital gains generated by selling the fund’s assets to the holders of the fund in the form of capital gain distributions. The fund holder will receive these distributions usually once per year, and they are paid either in cash or by issuing additional fund shares (reinvestment), in a similar process to dividend payment. Capital gain distributions are reported to the taxpayer (and the IRS) on Form 1099-DIV, and generally the amount will be added to the taxpayer’s long-term capital gains on Schedule D.

As mentioned in a comment below, in practice many ETFs are able to avoid distributing capital gains to the fund holders in a way that most traditional mutual funds are not able to do.

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    Worth mentioning that many ETFs, particularly stock index funds, are able to avoid capital gains distributions. For example ITOT hasn't distributed a capital gain for 15+ years. And Vanguard has a proprietary method that extends this to its mutual funds, so for example both VTSAX (mutual fund version of VTI) hasn't distributed capital gains for 20 years.
    – Craig W
    Sep 20, 2021 at 17:20
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    @CraigW A good point, and here is an article that explains it in more detail: bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge
    – Ben Miller
    Sep 20, 2021 at 17:31

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