When you buy stock in a company and sell it for a higher price at a later date, the money you made 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 that you invest in. Fund managers buy and sell stocks as they see fit, hoping to make a profit for you. If the fund holds a stock for more than 1 year and then sells it, the profit that’s made for you as an investor is usually paid out. When the profit is paid out (often by crediting your cash account), this payout is a capital gain distribution.
For tax purposes, capital gain distributions are reported to you in box 2a of Form 1099-DIV or on a similar statement from the mutual fund company. 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.