Man, one more year where my mutual fund barely moves but I get a letter from the fund company telling me that I made $3k!?! So, pay tax for that... Anyhow, to understand how to account for this, read this good explanation.
Basically, when the fund manager sells a winning stock, you pay tax for that. As long as he/she doesn't sell the losing ones, you can see the fund lower with a bunch of unrealized losses (same as would happen if you held the basket of stocks).
So, sure, pay year by year, but keep track of that, so, that in the end, the earnings that you pay tax for become part of the investment capital (!). So, when you finally sell it and realize the losses, your investment is higher than it was, and your losses are higher than they look like if you just looking at the price you paid for the mutual fund at the very beginning.
Basically, avoid double taxation... The link above gives an example where you actually made money overall, but it is the same concept...
Cheers!
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