Mutual Fund Short Term Taxes

[bootyman]

For a mutual fund, are you taxed based on your gain/loss on the fund or of the underlying holdings?

Say for example I buy xyz mutual fund.  It goes up in value this month and I sell.  All the holdings have been in the fund over 1 year.  Is this gain taxed at short term rates (because the underlying holdings have been in it longer then a year) or is it taxed at my ordinary income?

[forummm]

It depends on the fund. For actively managed funds (or poorly managed index funds), you may have to pay tax on capital gains distributions (money paid out to you as cash that is not a dividend but is a capital gain distribution). Those distributions might be short or long term. For most Vanguard index funds, you never have this happen. Actively managed funds are more likely to have this happen because they are buying and selling shares a lot and therefore have to realize gains a lot.

[Shor]

Distributions from a mutual fund are reported through a 1099-DIV at the end of the year.
When you are buying and selling shares of a mutual fund, the long/short term capital gain from the sale is based on your time holding the mutual fund shares, and not on the fund's time of holding its underlying assets.

Very similar to buying a stock and selling it at a gain.

If the Mutual Fund is doing a lot of short term capital gains from their trading, they'll take the tax amount out before it gets distributed to you.
Also, capital gain distributions from mutual funds are all treated as long term distributions regardless of how long you have held the mutual fund.

https://www.irs.gov/uac/reporting-capital-gains
https://www.irs.gov/pub/irs-pdf/p17.pdf