Capital Gains Distributions from mutual funds. Seems like getting taxed for the

[A HERETIC I AM]

1. How do you figure? (Edited for clarity)

The capital gain of a held stock would increase the price of the mutual fund

True, but it isn't a "Capital Gain", it's just an increase in share price.

and one would have to pay capital gains if one sold the fund.

Yes, unless of course, it is held in a qualified account. Also, the difference between short and long term CG tax rates is significant. Hold it for 366 days and you pay less than if you sell before the 365th day of ownership. (Working on old info here, from memory from back in '06 through '09)

That same capital gain is taxed even if one doesn't sell the fund and then again when the fund is sold.

How do you figure? Are you suggesting the Mutual Fund company pays a tax when a stock they hold in a portfolio goes up in value?

Capital Gains are gains that are REALIZED. You haven't realized the gain until you sell the security, just as you haven't realized a loss until you sell.

It is true that if a Mutual Fund sells a position at a price higher than they paid for it, it is a Capital Gain and all the shareholders benefit 'mutually'. This is one of the dangers in buying Mutual Funds late in the year, as many fund managers do a lot of buying and selling in the Fall. You could buy 100 shares of a fund late in the year, see no gain on your position but still be liable for CG taxes by the end of the year.

Edit here; To clarify the above, lets say you buy $1000 worth of a fund that has a "front load" fee - a sales charge and lets say that is 5%. You buy a grand worth, the fund company takes the 5% off the top and your account is credited with $950 worth of fund shares. If the fund realizes a capital gain on a particular stock or stocks but that gain does not total more than $50.00, you are still liable for the capital gains tax even though you haven't realized a gain on your initial investment of one thousand dollars. When you sell the fund shares then yes, you are liable for CG tax on the money above $1000 realized by the sale. BUT....if memory serves, the 1099 you get from the MF company will reflect only taxable gains on increase in share price, not gains on individual shares the manager sold along the way.