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It's all really one transaction.

I beg to differ. I'll bend just a little bit if we're talking about shares held in a tax-free or tax-deferred account but not at all in a taxable account, to wit:
In the course of the year the mutual fund (an investment company you own shares of) buys and sells shares, collects dividends on shares held and makes other transactions in accordance with their prospectus. The tax structure WRT mutual funds is that the funds themselves are not taxed but gains are accountable to the shareholders who will pay tax at their personal rates on the funds' dividends, short term capital gains and long term capital gains just as if the shareholder had directly held the stock (et al.) shares. If you hold the fund in a taxable account there will be separate entries and different tax rates in your 1040 schedules for Div, STCG and LTCG. Definitely not one transaction either at the fund or on the 1040.

Reinvestment of these gains is an option some people choose and others don't. What happens, usually in December, is this: first, on the distribution date the amounts of the respective gains are distributed to shareholders on the books of the fund so NAV (of investments) per share drops by that amount but the fund's total dollar amount is still there. Next, for those shareholders who take the distributions in cash, checks are written and for those who reinvest, additional shares are purchased at the new NAV. Simplistically, if you hold 100 shares worth $10 (a $1000 holding) on the distribution date and there's a 5% distribution split among Div, STCG and LTCG you now hold 100 shares worth $9.50 and $50 cash. Your $50 distribution money, reinvested, buys about 5.26 shares so you now hold about 105.26 shares at $9.50; still the same $1000 total. The dollar value of your holding has not changed at all, you simply hold more shares at a lower NAV. Of course, you owe the IRS tax on the $50 distribution.

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