We actually run into this question quite a bit. Look at it like this; A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management.
So, while you own shares in the mutual fund, the fund itself owns capital assets, such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for you is to sell these assets at a gain.
Under US law, if the mutual fund held the capital asset for more than one year, the nature of the income from a sale of the capital asset is capital gain – on a pro-rated basis – and the mutual fund passes it on to you as a capital gain distribution. These capital gain distributions are usually paid to you or credited to your mutual fund account and are considered income to you. Form 1099-DIV, Dividends and Distributions distinguishes capital gain distributions from other types of income, such as ordinary dividends.
For this reason, US tax law considers capital gain distributions as long-term capital gains no matter how long you’ve owned shares in the mutual fund.
However, these transactions also meet the requirement of capital gain under German tax law and if you do not also have a place to live elsewhere, the US-German tax treaty allocates the taxation rights for capital gains to Germany as your country of treaty-residency.
Where German tax law is different is from its US counterpart is, that it would not make a difference between long and short term capital gains.
Also, contrary to income from dividends, any tax already paid or withheld on capital gains cannot be credited against any German tax.
