When a mutual fund declares a capital gain distribution that you must declare the gain on your taxes & that the value of the shares declines by the gain.

Right. So the total value of your mutual fund holding doesn't change (except for market fluctuations) after the capital gain dividend. Same thing happens for ordinary dividends, too.

This is true rergardless of how long you have owned the fund shares.

Right again. If you purchase a fund, and the next day collect a capital gain dividend, you've manufactured a long-term gain in one day.

But, what happens when the gain is negative? Do you get to declare a capital loss? And do the funds shares increase by the negative gain amount?

There's no such critter. Mutual funds declare capital gain dividends basically to avoid paying tax on their gains. They could choose to pay the tax themselves, but almost never do, because they will almost always pay more in taxes than their shareholders in total would.

Capital losses in a mutual fund are retained in the fund to offset future gains. AFAIK, there is no provision for distributing capital losses to shareholders.

--Peter