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I'm new to mutual funds--currently the only ones I own are part of my 401ks. Several of us small investors around the office have been discussing the distributed capital gains that holders of non-tax-protected mutual fund shares pay each year.

Sooner or later, you'll end up selling your shares of the fund--hopefully for a lot more than you paid all those years ago. Do you have to pay long-term capital gains on the difference between the original purchase price of the shares and the eventual sale price? Or does the cost basis of the shares get adjusted every year as part of the capital-gains distribution routine?

And if it's the former and not the latter, isn't that double taxation?

My apologies if this has already been answered on the board. I searched, but couldn't find it...
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