A distribution is money paid to shareholders by a mutual fund from dividends or interest earned or capital gains realised on the sale of securities in its portfolio. Unless you own the fund through a tax-deferred or tax-free account, you must pay federal income tax on most distributions, with the exception of municipal bond fund interest income. Whether you reinvest the money to buy more shares in the fund or not, the tax is due. Short-term gains and interest income will be taxed at your regular rate. The tax on qualifying dividends and long-term capital gains is computed using your long-term capital gains rate. Your year-end statement will show which income falls into which category. The term distribution is also used to describe specific actions taken by a corporation. For example, if a corporation spins off a subsidiary as a standalone company, current stockholders will receive shares in that subsidiary. This is known as a distribution. Corporate dividends are also known as distributions.