What type of income are dividends and capital gains from mutual funds subject to?

Dividends and capital gains from mutual funds are subject to ordinary income taxation. This is because dividends received from mutual funds are generally taxed as ordinary income, which means they are subject to the regular income tax rates applicable to the individual’s income bracket.

Additionally, while capital gains that are realized from the sale of mutual fund shares may qualify for long-term capital gains rates if the shares were held for more than one year, the broader context of the question pertains to how mutual funds distribute income to investors. This means that the dividends, often derived from the fund's investment income, are taxed at the investor's ordinary income tax rate, unless other specific provisions apply.

Understanding the taxation of mutual fund distributions is crucial for investors as it affects net returns. The earnings from dividends and capital gains can influence investment decisions and financial planning, especially with regard to tax efficiency and expectations for future income.