Question: 
How can I avoid paying capital gains taxes on my emerging markets fund, which is still under water?

Answer:
You may not have to do anything, but the answer will require a little research (perhaps only a telephone call) on your part. Your strategy of choice depends on what action you are contemplating.

If you plan to hold onto your fund shares, you will pay capital gains tax only if the fund makes a capital gains distribution. The only way to find that out is to contact the fund family and ask if the fund expects to make one this year. Don't delay, because many mutual funds are planning to make distributions in the first half of December. If you own shares on the record date, you'll be stuck with the tax, period.

This could be an important issue, because many emerging market funds have made big gains this year. However, most of these funds had serious losses in 1997 and 1998, and those losses may have been carried forward for tax purposes to offset gains they made this year. Again, the only way to know is to ask.

If you are indeed "under water" in a fund that is going to make a distribution, you'll pay tax on the distribution regardless of what you paid for the shares. You can avoid the tax if you sell the shares before the record date of the distribution.

If you sell shares for less than you paid for them, you'll have a capital loss for tax purposes. But if you're going to sell, be sure you sell before the capital gains distribution. Otherwise your "real" losses will be diminished by the distributed gains.

If you sell your fund at a loss but want to remain invested in emerging markets, you can't buy back into the same fund within 30 days. If you do, you will lose any tax benefit from your capital loss. This means you should either wait (at the risk of losing out on appreciation in the meantime) or choose another emerging markets fund. If you choose another fund, be sure to ask about pending capital gains distributions before you invest. Otherwise you could get stuck with a tax bill for capital gains from which you never benefited.

If all this is too much to sort out, consult your tax advisor.