The built-in gain in a mutual fund’s portfolio is referred to as “tax overhang.” Tax is imposed on investors who buy shares in mutual funds with tax overhang even though the gain accrued before their investment. The consequence is accelerated tax, increasing the shareholders’ effective tax rate. This article (1) explains why this occurs and why it is a problem, (2) describes the magnitude of the problem, (3) describes and illustrates avoidance strategies funds use to avoid the bad effects of tax overhang, (4) argues that reform is warranted, and (5) describes and evaluates the options for reform. 

Citation
Ethan Yale, Mutual Fund Tax Overhang, 38 Virginia Tax Review, 397–444 (2019).