Unexpected Tax Bills Coming Due on Last Year's Big Gains

In the wake of last year's outsize mutual fund returns, we're starting to see those returns' tricky little friend: capital gains distributions.

Last year, the average technology fund rocketed to a 135% return, and the average for small-cap growth and mid-cap growth funds was 61.8% and 65%, respectively, according to Morningstar. Now, as fund managers sell some of the stocks that propelled those returns, they're realizing big capital gains. And if those gains outweigh any accumulated losses from stock sales, they must be passed on to shareholders. Most shareholders simply reinvest the gains in additional shares of the fund, but they're still taxable.

Recently, several funds have paid out mammoth capital gains. On Monday, the (WPJPX Quote)Warburg Pincus Japan Small Company and (WPJGX Quote)Warburg Pincus Japan Growth funds, which returned well over 250% last year, paid out titanic gains equal to 55% and 22%, respectively, of their net asset values. The net asset value, or NAV, is the value of one share of a fund. ...