However, the management of capital gains greatly affects investors' after-tax returns. The good news is that the capital gains tax rate is considerably lower than the income tax rate, provided the asset is held for more than one year. That is, they represent profits on holdings that have not yet been sold. Obviously, you have control over the latter, but you can't control what the fund manager does while you hold the fund. Because a manager has discretionary control over the portfolio, his or her actions directly affect your return and your tax bill.
Investors can take the gain in cash or reinvest it.
Either way, they pay taxes on it. The Pain of the Gain Capital gains are distributed every year around this time, but this year it seems like there's a brighter spotlight on the tax burden this may cause. Even if your fund posted a negative return for the year, you may find yourself owing taxes. Let's say it's 1997 and the fund holds 25 stocks. Now it's 2000, you buy into the fund, and all of a sudden, the price of stock Z starts dropping.