Frequently Asked Questions

Here are some frequently asked questions on capital gains distributions.

What are capital gains?
Under federal law, mutual funds are required to distribute to shareholders excess net gains that occur when a fund sells a security and receives a profit as a result of that sale. When a capital asset is sold, the difference between the amount the asset is sold for and the base cost for which it was purchased is a capital gain or a capital loss. Capital assets include property held for investment, such as stocks, bonds, or shares of a mutual fund. If a mutual fund has gains that cannot be offset by losses, those gains must be distributed to shareholders in the form of either a short-term or long-term capital gain, or a combination of the two.

Mutual funds typically distribute capital gains to shareholders annually, near the end of the calendar year. It is important to note that, in certain situations, capital gains may be distributed to shareholders more than once a year at any time of the year.

How are capital gains distributed to shareholders?
Shareholders may receive capital gains distributions in cash, or they may reinvest the distributions into their accounts as additional shares (or a fraction of a share).

Distributions are subject to income tax in the year that they were declared and are reported annually, if applicable, on Form 1099-DIV, whether they are received as cash or reinvested into a shareholder’s account.

How can mutual funds pay capital gains distributions when the market is either flat or down?
When the value of a fund holding increases, the fund has an unrealized gain until the security is sold. Once this security is sold, however, the fund realizes the gain and must pay a distribution unless the gain is offset by capital losses. Consequently, a fund’s capital gains distribution in a particular year is a result of the sale of securities that may have appreciated in value over time, perhaps during prior years when the fund’s returns were positive.

What is a shareholder's tax liability on capital gains?
Capital gains can be paid out to shareholders or reinvested into a fund in the form of new shares. Either way, shareholders in taxable accounts are subject to taxes on the payout in the year the capital gains are distributed.

The length of time that a fund owned a security determines the rate at which the capital gains will be taxed. For securities held for 12 months or less, capital gains are considered short-term capital gains, while capital gains distributions for those held for more than 12 months are considered long-term capital gains.

Short-term gains are taxed at ordinary income tax rates. The top individual tax rate on long-term capital gains is currently 15%.

Why are the estimated capital gains for the following five funds larger (as a percentage of the funds’ NAV) than the distributions for other funds?

• Wells Fargo Advantage Common Stock Fund
• Wells Fargo Advantage Disciplined U.S. Core Fund
• Wells Fargo Advantage Discovery Fund
• Wells Fargo Advantage Intrinsic Value Fund
• Wells Fargo Advantage Small Cap Opportunities Fund

The Wells Fargo Advantage Common Stock Fund’s estimated capital gains can be attributed to the following:

• Strong market conditions caused certain holdings to reach valuations that approached the higher end of the team's assessed price-range tolerance. However, the team has remained disciplined in selling off holdings that it believes were near their full market value.
• Merger and acquisition activity in the market caused the portfolio managers to sell certain holdings with long-term gains.

The Wells Fargo Advantage Disciplined U.S. Core Fund’s estimated capital gains can be attributed to the following:

• The fund’s quantitative strategy and focus on managing risk relative to the fund’s benchmark resulted in securities sales on which capital gains were realized by the fund.
• A slightly higher level of portfolio turnover during select periods of short-term market volatility also resulted in capital gains.

The Wells Fargo Advantage Discovery Fund’s estimated capital gains can be attributed to the following:

• Appreciation in stock prices caused numerous holdings to reach their valuation target, leading portfolio managers to trim or eliminate them in order to execute their investment process and manage overall portfolio risk.
• Merger and acquisition activity in the market caused the portfolio managers to sell certain holdings with capital gains.

The Wells Fargo Advantage Intrinsic Value Fund’s estimated capital gains can be attributed to the following:

• Long-held securities in the fund were sold, resulting in capital gains.
• Movement in stock prices caused certain holdings to reach their price targets, leading portfolio managers to sell them.

The Wells Fargo Advantage Small Cap Opportunities Fund’s estimated capital gains can be attributed to the following:

• Long-held securities in the fund were sold, resulting in capital gains.
• As holdings approached the team’s price targets, the portfolio manager trimmed or sold them.

What actions can shareholders take to mitigate the tax liability on capital gains distributions?
Shareholders should consult their tax professionals to determine what course of action is most appropriate for their individual situations.

What steps does Wells Fargo Advantage Funds take to manage tax implications of portfolio transactions?
In conjunction with managing each fund to its respective investment objective and within its stated investment strategy, portfolio managers receive information relating to the current tax status of their funds’ holdings in order to assist them as they consider security transactions.

How will shareholders be notified of the estimated and actual capital gains distributions?
Wells Fargo Advantage Funds will post notification regarding projected distribution ranges to wellsfargoadvantagefunds.com on Monday, November 5, 2012.

Wells Fargo Advantage Funds will post notification regarding actual capital gains distribution amounts to wellsfargoadvantagefunds.com on or around the ex-dividend date (December 7 or December 10, 2012) for each fund.