Legal Definitions - capital-gain distribution

A capital-gain distribution occurs when an investment company, such as a mutual fund or an Exchange Traded Fund (ETF), pays out profits it earned from selling its investments (like stocks, bonds, or real estate) for a higher price than it paid for them. These profits are considered "capital gains" for the fund. Instead of retaining these gains, the fund distributes them to its shareholders, who then typically owe taxes on these distributions, even if they choose to reinvest the money.

• Example 1: Annual Mutual Fund Payout

  An individual owns shares in a diversified equity mutual fund. Throughout the year, the fund manager sells several stocks that have performed exceptionally well, realizing significant profits. At the end of the fiscal year, the fund calculates its net capital gains from these sales and distributes a portion of these gains to all its shareholders as a year-end payment.

  This illustrates a capital-gain distribution because the mutual fund is passing on the profits (capital gains) it earned from selling its underlying stock investments directly to its shareholders.

• Example 2: ETF Rebalancing Distribution

  An investor holds shares in an Exchange Traded Fund (ETF) focused on emerging market bonds. Due to a shift in market conditions, the ETF manager decides to rebalance the portfolio by selling a large block of bonds that have appreciated in value since their purchase. The profits generated from these sales are then distributed to the ETF shareholders as a mid-year payment.

  Here, the ETF, similar to a mutual fund, distributes the profits (capital gains) from its strategic sales of appreciated bond assets to its investors, which is a clear instance of a capital-gain distribution.

• Example 3: Real Estate Investment Trust (REIT) Property Sale

  A retired couple invests in a Real Estate Investment Trust (REIT) that owns and manages a portfolio of commercial properties. The REIT sells one of its older shopping centers for a substantial profit after holding it for many years. A significant portion of this profit, representing the capital gain from the sale of the property, is then paid out to the REIT's shareholders.

  This demonstrates a capital-gain distribution because the REIT, functioning like an investment fund, distributes the profit (capital gain) from the sale of an appreciated physical asset (the shopping center) to its shareholders.