Because of the complexity of IRS tax laws, owing taxes on mutual funds happens more than one would think.  It occurs when a fund manager sells a stock, or other asset, that is held within the fund, for a gain.  The taxable capital gains are passed on to the owner of the fund. 

Let’s say you own ABC Fund and the manager bought shares of Google @ $200/share and six months later sold it for $300/share.  Initially this looks great.  The manager made money for the fund.  But mutual funds are made of many different stocks and if the value of the other shares “in the basket” cause the price of the fund to decline - then you sell it at a loss - you would be required to pay capital gains on the capital gains of the google sale.

Although this is a simple example, it is important to understand if you own a mutual fund.  If you are concerned or want to know more about mutual fund tax implications, contact your financial adviser or tax accountant.