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What is 'Capital Gain'


BREAKING DOWN 'Capital Gain'


While capital gains are generally associated with stocks and funds due to their inherent price volatility, a capital gain can occur on any security that is sold for a price higher than the purchase price that was paid for it. Realized capital gains and losses occur when an asset is sold and triggers a taxable event. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment's value but have not yet triggered a taxable event.

Tax Consequences of Capital Gains and Losses

Tax-conscious mutual fund investors should determine a mutual fund's unrealized accumulated capital gains, which are expressed as a percentage of its net assets, before investing in a fund with a significant unrealized capital gain component. This circumstance is referred to as a fund's capital gains exposure. When distributed by a fund, capital gains are a taxable obligation for the fund's investors.

Short-term capital gains occur on securities held for one year or less. These gains are taxed as ordinary income based on the individual's tax filing status and adjusted gross income. Long-term capital gains are usually taxed at a lower rate than regular income. The long-term capital gains rate is 20% in the highest tax bracket. Most taxpayers qualify for a 15% long-term capital gains tax rate. However, taxpayers in the 10% and 15% tax brackets would pay a 0% long-term capital gains tax rate.

Capital Gains Distributions by Mutual Funds

Mutual funds that have accumulated realized capital gains throughout the course of the year must distribute those gains to shareholders. Many mutual funds distribute capital gains right before the end of the calendar year.

Shareholders of record as of the fund's ex-dividend date receive the fund's capital gains distribution. Individuals receiving the distribution get a 1099-DIV form detailing the amount of the capital gain distribution and how much is considered short-term and long-term. When a mutual fund makes a capital gain or dividend distribution, the net asset value (NAV) drops by the amount of the distribution. A capital gains distribution does not impact the fund's total return.

  1. Capital Gains Tax

  2. Capital Gains Distribution

  3. Long-Term Capital Gain Or Loss

    A gain or loss from a qualifying investment owned for longer ...
  4. Capital Gains Treatment

  5. Return On Capital Gains

    The return that one gets from an increase in the value of a capital ...
  6. Taxable Gain

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