If you buy stock in a company and sell it later for a higher price, the money you make is called a capital gain. If you sell the stock after holding it for more than 1 year, it's considered a long-term capital gain.

The same is true for mutual funds you invest in. Fund managers buy and sell stocks hoping to make a profit. If the fund holds a stock for more than 1 year and then sells it, the profit you make as an investor is usually paid out. The profit paid out is a capital gain distribution. This also applies to pay-outs made by crediting your cash account.

For tax purposes, Form 1099-DIV, box 2a or a similar statement from the mutual fund company reports your capital-gain distributions. These distributions are taxed at a lower rate than ordinary income. They're treated as long-term gains, regardless of how long you actually owned shares in the mutual fund.