Can a fund shareholder owe tax on fund capital gains in a year when the fund lost value?

1. Holding an individual stock defers capital gains tax until the investor sells at a profit. 2. A fund is different, because the law requires it to distribute net capital gains on the sale of portfolio securities. 3. Those distributions are taxable to the shareholder in the year they are made. 4. That holds even if the fund's overall return for the year was negative and the investor sold nothing. 5. Losses inside the portfolio are netted against gains before distribution, but they do not erase a net gain. 6. A tax-advantaged account such as an IRA or a 401(k) removes the problem rather than creating it. 7. So a shareholder can face a tax bill in a year the holding fell in value. _Source: US SEC Office of Investor Education and Advocacy, "Mutual Funds and ETFs: A Guide for Investors", section Tax Consequences_