Why did I owe taxes on a mutual fund even though I never sold any shares?

Mutual funds are required to pass through to shareholders the capital gains they realize internally when the manager sells holdings during the year. These capital gains distributions, usually paid in December, are taxable to you in a regular brokerage account even if you reinvested them and didn't sell a single share. Actively managed funds with high turnover are the worst offenders, and you can get hit even in a year the fund's price fell. ETFs and index funds are far more tax-efficient because of how they're structured and their low turnover. Two defenses: hold tax-inefficient funds inside an IRA or 401(k) where distributions don't matter, and avoid buying a fund right before its distribution date ("buying the dividend"), which saddles you with a tax bill on gains you never enjoyed.