This may seem counter-intuitive. If your investment’s performance has been lackluster, why should you have to pay seemingly high taxes on it?

To understand why this happens, let’s see how capital gains distributions are generated. Your mutual fund is composed of many individual securities. When a portfolio manager buys and sells securities within the fund, a gain or loss may be generated. Legally, the fund must distribute any gains generated to the shareholders of the fund. These distributions are taxable to you every year, no matter how the fund has performed.

Let’s look at a simplified example. Suppose you own 10 shares of XYZ Growth Fund. XYZ started the year by selling for $25 per share, and closed the year at $24 per share — so you’ve actually lost $10 of your investment. But during the year, XYZ sold its holdings of “Jet Electro” stock, which had tripled in value in the three years since the portfolio manager bought it. The Jet Electro sale gave XYZ a hefty amount of long-term capital gains. Legally, the fund must then pass along to you the capital gains.

Before you see these distributions show up on Form 1099-DIV, is there anything you can do about them?

You might consider exchanging your XYZ fund for another mutual fund in the same fund family. If this second fund issues less in capital gains distributions than XYZ, or no distributions at all, than you could come out ahead from a tax standpoint. Be careful though: the IRS has strict rules regarding these types of “tax swaps.” In addition, if you have owned the original fund for a long time, you may have built up capital gains in the actual share price. The sale of the fund, in this case, would also generate a capital gains distribution. Before you make any decisions, it’s very important that you consult a qualified tax professional.

Furthermore, this exchange of funds could end up hurting your overall investment picture. You may have chosen XYZ because you liked its investment philosophy, its management team and its long term objectives. You must decide if you really want to sacrifice these benefits because of one year of higher taxes coupled with moderate performance.

Keep in mind the tax implications are just one aspect of mutual fund ownership. Most long-term capital gains are taxed at 20 percent if your tax bracket is 28 percent or higher, or at 10 percent if your tax bracket is 15 percent. In other words, your long-term capital gains are being taxed at a considerable lower rate than earnings from an investment on which you pay income taxes.

If taxes are more of an annoyance than a source of real concern, don’t make any hasty decisions. As a long-term mutual fund owner, your investment horizon stretches well beyond next April 15.