I own shares in a stock mutual fund that declined in value this year by nearly 50%. I received a Form 1099-DIV reporting a capital gain distribution. How can this be?

I own shares in a stock mutual fund that declined in value this year by nearly 50%. I received a Form 1099-DIV reporting a capital gain distribution. How can this be?

A fund may realize capital gains when it sells its holdings — something that many funds had to do in 2008 in order to satisfy redemptions from its shareholders. The fund has gains when it acquired its holdings for less than it sold them; your basis in the fund shares has no impact on the fund's gains. Report the capital gains distribution on Schedule D if you're required to file this schedule, or directly on Form 1040. The maximum tax rate on capital gain distributions is 15%; those in the 10% or 15% tax bracket pay no tax on this income.