The IRS considers fund earnings as short-term gains, which require higher tax rates than long-term earnings.
Typically, the IRS considers long-term capital gains as earnings from investments held for one year or more at the time you sell shares.
A liquidating trust is a new legal entity that becomes successor to the liquidating fund.
The short-term and long-term taxes you pay when liquidating your shares of a fund can depend on the type of fund in which you invest.
At the end of the fund's life cycle or term, the fund manager may have certain assets that are not easily liquidated and convertible into cash for distribution to the owners of the fund.
It may take several years for such assets to be converted into cash.
While you still may face capital-gains taxes when liquidating shares, your tax liability may be less in a low-turnover fund, due to lower gains, as compared to a high-turnover fund.
If you own shares of a high-turnover mutual fund, a fund which the manager buys and sells investments frequently, you can place your shares within a tax-deferred account to reduce your tax liability on dividends.