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In US federal tax, what is the relation and difference between capital gain distribution and capital gain?

For example, the two terms are distinct in the instructions of 1040

Exception 1. You do not have to file Form 8949 or Schedule D if both of the following apply.

  1. You have no capital losses, and your only capital gains are capital gain distributions from Form(s) 1099-DIV, box 2a (or substitute statements).

  2. None of the Form(s) 1099-DIV (or substitute statements) have an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain), or box 2d (collectibles (28%) gain).

Thanks.

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Capital gains are when you sell an asset for more than it was purchased for. This can occur when you sell a house, collectible, stocks, bonds.

A capital gain distribution is when the mutual fund, or ETF, has sold assets and now has capital gains. They then pass the gains onto the investors. These gains are either paid directly to the investors, or are used to purchase additional shares and those are credited to the investors accounts.

If you sell an asset you need to include additional information to be able to determine the capital gain, and thus the taxes.

If you are receiving a distribution of capital gains, the math and documentation was already done by the trustee. Of course when you sell shares, or withdraw funds then you will have to provide the numbers to determine if those shares have gains.

The actual taxes if any depend on the type of account: Taxable, IRA, 401K, Roth or not.

  • Thanks. Does capital gain distribution not necessarily mean there is capital gain and can be capital loss? If I remember correctly, I remember a mutual fund made capital gain distribution in spite of losing money. – Tim Jan 11 '17 at 16:02
  • @Tim: if the fund has net capital loss, it is not distributed, but they can carry it forward and subtract it from gains in a future year (with some limitations); you can see this in their annual financial report. Note that a gain or loss (realized or not) on your shares in the fund is completely separate from any gain or loss realized by the fund on its holdings. As an extreme example, in 2008 many funds were forced to liquidate holdings when lots of investors panicked and pulled out, so they sometimes realized gains -- and distributed them -- even though their NAV was down about 50%. – dave_thompson_085 Jan 11 '17 at 17:35
  • From the IRS's Reporting Capital Gains page: "Capital gain distributions from mutual funds are reported to you on Form 1099-DIV, Dividends and Distributions. Capital gain distributions are taxed as long-term capital gains regardless of how long you have owned the shares in the mutual funds." – rlandster Mar 23 '17 at 3:04

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