Many investors elect to have their distributions automatically reinvested in their mutual funds. But it’s important to remember that those distributions are taxable regardless of whether they’re reinvested or paid out in cash.
Reinvested distributions increase your cost basis in a fund, so it’s critical to track you basis carefully to avoid double taxation. If you fail to account for these distributions, you could end up paying tax on them twice. Once when they’re paid and again when you sell your shares in the fund.