[Stu from NYC]

Originally Posted by retiredguy123

With mutual funds, there are two ways you can owe capital gains taxes. One way is for the fund manager to sell individual stocks within the fund and issue a capital gains distribution to the fund shareholders. The other way is if you sell some of your fund shares yourself that have appreciated in value. In either case, you will see the income unless you have directed the fund manager to reinvest the capital gains distributions by buying additional shares of the fund. In that case, you will see the income as additional shares in your fund account.

For the mutual funds that I own, I direct the fund manager to transfer all capital gains distributions and dividends into my money market account. That way, I always have the same number of mutual fund shares in my account, and the income shows up as a deposit into my money market account. But either way, the income is taxable.

Interesting but a question. If fund is doing well (and you do not need funds for current expenses) why not reinvest capital gains and dividends? Especially since interest rates are pitifully low right now.