The time tested truth is if you have a profitable year in mutual fund investing, be prepared for a big tax bite.

Remember, even if you don't sell your fund shares, you're on the hook for moves made by the fund manager unless you own the fund in a tax-deferred account such as a 401(k). Qualified stock dividends and long-term capital gains are typically taxed at 15 percent; interest income and short-term gains will be levied at federal income tax rates, which can be as high as 35 percent.

One reason for the increased taxes is that the market has been especially volatile this year. Large caps overtook small caps as the market's favorites, for example, while emerging markets, homebuilding and energy stocks have moved abruptly in and out of favor. To stay on top of these market shifts, many fund managers traded more frequently.

"All these changes have resulted in higher taxable gains," says Tom Roseen, senior research analyst at Lipper.

And compared with past years, fund groups also have fewer bookkeeping tricks to minimize their distributions. Funds had been able to offset capital gains with losses that were racked up during the 2000-2002 bear market. But "after three years of gains, many funds have used up much of their tax-loss carry forwards," says Duncan Richardson, chief investment officer at Eaton Vance.