Capital Gain Taxes on mutual funds

Had a question on how mutual funds are taxed. If I have a regular mutual fund account do I have to pay taxes on the money if I never withdrawal it out of the fund? Also if I had a fund that I put $10,000 in and 3 years later was worth about $15,000 can I withdrawal the $10,000 without triggering capital gain taxes as long as I leave the gain of $5,000 in place. Thanks

Each year funds must distribute their cap gains and dividends to shareholders like you. If your fund distributes them to you, you are responsible for the taxes, even if you didn't withdraw any money from the fund.

As to the second part, there are different methods of withdrawing shares that can affect your taxable burden, but it is likely you'll pay cap gains in some amount on your gains.

Benryanv,

When we take some money from our taxable mutual fund account, we are selling shares of that fund.

We need to know when we purchased the shares we are selling.
This will help us determine if it is long term or short term capital gain, and how it is to be taxed.

We need to know how much we paid for those shares we are selling.
This helps us to know if we have a gain or a loss.

If you have your dividends and capital gains reinvested in the mutual fund, each time the fund pays the dividend or distributes a capital gain, you buy additional shares of the fund with that money. It is your responsibility to keep track of the date purchased, and cost of these additional shares.

You will receive a 1099-B from the fund that shows how much capital gain you received during the year. You will also receive a 1099-div (sometimes the 1099-B and 1099-DIV are one form) that shows how much dividend you received during the year. These forms will not show how many shares you purchased with the reinvesting of this money. You must look at your statements for that information.

In addition to clydewolf's usual excellent answer, I'll add this, hoping to bring some clarity to benryanv's original question:

You asked if, when you purchased a position for $10,000 that three years later is worth $15,000, could you only withdraw the $10,000 portion (non-taxed).

It depends upon the structure of your holding. If you purchased 100 shares at $100 each (for the total price of $10,000), and now your position is still 100 shares but the price has appreciated to $150 apiece, each share that you sell contains capital gains of $50, so no, you can't just withdraw the nontaxed portion. Every share has a portion that is taxed ($50), plus a portion that is return of capital ($100).

On the other hand, if you purchased that same lot of 100 shares for $100 dollars, but now, through capital gains and dividend reinvestments you hold 150 shares that are worth $100 each, then you could sell only the original 100 shares and not pay any tax on it. It wouldn't matter though, as you will have paid cap gains tax on your cap gains distributions (as they are reinvested) as well as tax on the dividends, during the years that you received them. If the shares had not grown in value, you will not owe capital gains tax on them when you sell them.

These are the two extremes - most of the time we have a combination of inherent gains within the shares (price appreciation) and reinvested dividends/cap gains augmenting the position. Add in a stock split or two, and you've got some real fun with a Schedule D, in my opinion...