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I didn't sell fund shares - why do I have a tax bill?

If you hold a mutual fund in an account that isn't sheltered from taxes - that is, outside a 401(k), IRA or similar plan - you'll probably owe some taxes on the fund every year, even if you don't sell a single share. That's because as a fund owner, you also own all the stocks, bonds or other holdings in the fund's portfolio.

So for your stock funds, you'll have to pay taxes on stocks your fund manager sold that year, as well as on the dividends that the fund collected. For your bond funds, you'll have to pay ordinary income taxes on interest. (Some bond funds, however, such as municipal bond funds, escape taxation.)