Mutual funds with big losses can still trigger taxes

— -- You've just lost 35% in your mutual fund. Could things get worse? Of course. Your fund could make a big, taxable capital gains distribution — and many are.

The average stock mutual fund has plunged 40%, vs. 38% for the Standard & Poor's 500-stock index with dividends reinvested. But a few funds will be handing a heaping helping of tax liability with their losses:

•Fidelity Select Energy Portfolio, down 57% this year, will pay an estimated $2.85 per share in long-term capital gains — about 10% of its share price.

•Vanguard Health Care fund (investor class) will pay about $8.07 per share in gains, equal to 7.7% of its share price. The fund has fallen 24% this year.

•American Funds' New Perspectives fund, down 41%, will make gains payouts of 7% to 9% of its share price. It didn't provide a dollar figure.

How can a losing fund have a long-term gain? Some funds have long-held positions with big gains. If they sell those positions, they may have gains to distribute. Although many funds try to offset gains by selling losers, some don't — and that results in real tax pain for shareholders.

Investors in retirement accounts, such as 401(k)s, don't have to worry about gains distributions, because the accounts are tax-deferred or tax-free.

But if you own a fund in a taxable account, a distribution may mean that you'll pay more in taxes. By law, funds have to distribute their long- and short-term gains each year.

Suppose you own 500 shares of a fund that pays $2 per share in long-term capital gains, or $1,000. It also pays 50 cents in short-term gains, or $250. Long-term capital gains taxes are taxed at 15%, so you'd owe the IRS $150. Short-term gains are taxed at your maximum tax rate. In the 25% tax bracket, you'd owe $62.50.

You get the distribution — and that tax liability — even if you invested in the fund just before the fund's record date — the date the fund uses to determine who gets the payout. So you shouldn't invest in a fund between now and the end of the year unless you're certain it has made its distribution.