Every year, many investors find themselves “buying a distribution” and incurring liabilities that could have been avoided or at least deferred.

Tax law requires that realized gains in a portfolio be distributed at least annually, typically in December. If you’re about to buy, it pays to check the next distribution “record date” prior to making a purchase.

How can this affect you? Suppose you’ve decided to get back into the equity market before year-end. On December 22 (which happens to be the record date for the mutual fund you plan to purchase), you invest $50,000 at $20 per share, for 2,500 shares.

On December 23, the fund pays out a distribution of $1 per share. Ignoring market appreciation/depreciation, the share price then drops to $19. Since you received the distribution and you hold the shares, you haven’t technically lost money, but you’re now liable for taxes on a $2,500 capital gains distribution.

This is the result whether you reinvest the distribution or take it in cash. Again, ignoring market appreciation/depreciation, if you wait until after the record date to buy you could still invest $50,000 in the fund—this time at $19 per share for about 2,632 shares—without incurring a current tax liability. Paying that tax bill would increase your cost basis,* so all is not lost. But the tax bite could be a nasty surprise.

How to avoid this—or at least make an informed decision? Find out if there’s a substantial amount of realized gains in the portfolio relative to its net asset value.** And, of course, be aware of the next record date.

Looking for your fund’s capital gains? Capital gains distribution information for Vanguard mutual funds is published on vanguard.com. To see record dates and the most recent distributions for your Vanguard funds, click here, then select the Distributions tab.

* Cost basis: The original cost of an investment (adjusted for commissions or capital distributions). For tax purposes, an investment’s cost basis is subtracted from its value at the time of sale (minus fees and commissions) to determine any capital gain or loss.

** Net asset value (NAV): The market value of a mutual fund’s total assets, minus liabilities, divided by the number of shares outstanding.

Note: All investments are subject to risks.