Are income in Mutual Funds taxed as Ordinary Income or Capital Gains?

The answer is both.

Capital gains is only beneficial to you at a lower tax rate (15%) when it is a LONG term investment (held more than 1 year)
Some things in your M Fund will be long term. If you have the Mutual set up in a way that long term tax rates pass through to you, the taxpayer, then you benefit. ... And only then.

The majority are taxed as OI.

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