A rising stock market carries with it some hefty tax bills for mutual fund shareholders, according to a recent Morningstar article.

Many active funds have been dealing with asset outflows over the past few years, forcing fund managers to “sell appreciated positions to meet investor withdrawals, and that action triggers capital gains distributions.”

The article explains some of the factors to consider in the current capital gains scenario, including the following:

• Investors will owe taxes on distributions occurring in a taxable account unless they sell positions to capture gains. However, the article points out, “most investors don’t have a lot of losing holdings in their portfolios at this point.” The tax event, it points out, occurs whether the distribution is spent or reinvested.
• Reinvested capital gains, however, do increase cost basis, which “has the potential to lessen the amount of capital gains taxes due when the position is eventually sold.”
• Investors in tax-sheltered accounts, on the other hand, will only owe taxes when they begin selling holdings (with the exception of qualified withdrawals from Roth IRAs, which are not taxed at all).