If you intend to sell mutual fund shares at a long-term capital gain, you probably should sell before the year-end distribution. Such a distribution might include long-term gains, short-term gains, and dividends that do not qualify for the bargain 15 percent rate on stock dividends.
If you hold onto those shares until after you receive that distribution, some of that payout (the short-term gains and nonqualified dividends) may be subject to a federal tax rate as high as 35 percent. Instead, if you sell before the distribution and you’ve held all the shares for more than one year, all of your gain will qualify as long-term, with federal tax rates at 15 percent or lower.
