My mutal fund had capital gains distribution in 2005. Do I include that in my 2005 tax return?

I am trying to validate my understanding of mutual funds and their tax implications.

Say I invested $100,000 in some mutual funds and the funds had a $8000 capital gains distribution in 2005. The gains were credited as additional shares in my account and my "cost" according to the mutual fund, is now $108,000. However, for the for 2005 taxes, it appears that I have to declare the $8000 gain as income and pay taxes on them. Is this correct?

Also, what happens, for example, if in 2007, the funds drop and I sell them all for $100,000? I have paid taxes on the $8000 gain, so now I have a $8000 capital loss. Is this correct?

Thanks.

You're correct. Presumably you received a 1099-DIV with $8000 (or whatever) in the cap gains distribution. You would need to include that amount in your return. When you sell the shares, that amount will be included in your basis so your eventual gain will be total sales price-$108,000.

I may be wrong on this, but if the distribution was in the form of additional stock, you don't pay anything until you sell it. One way to be sure: you should receive a 1099 from the fund company, which should give you some idea of how the distribution is to be treated.

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