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End of year tax gain harvesting question
Old 12-27-2010, 03:17 PM   #1
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End of year tax gain harvesting question

Bob has $120,000 in carryover losses going into 2010. Bob owns a mutual index fund with $200,000 unrealized gains over cost basis. Bob's index fund is scheduled for an end-of-the-year distribution of $5,000 to Bob on Dec 30, if Bob does not sell any of his fund before then.

Bob contemplates the following scenarios:

1. Sell HALF his mutual fund position ($100,000 gain) and buy a fairly similar ETF with a lower expense ratio and no future end of 2010 distribution, carefully avoiding wash rule. This would use up $100,000 of Bob's $120K in carryover losses, but reduce his end of the year mutual fund distribution by $2500, which at 15% tax rate would save him $375 in federal taxes (plus state taxes). This would also leave him $20,000 in carryover losses that he could use in the future to offset regular income, and put him in a similar fund with a lower expense ratio (about .1% lower).

2. Do nothing, pay the distribution tax on the entire mutual fund, and keep his carryover losses.

(Assume that including the capital gains income on top of Bob's regular income would put him in the 15% capital gains tax bracket).

Which should Bob do, and why?

And should anticipation of rising capital gains tax rates in the future impact his decision? (I would think not, since offsetting the same gains at 20% later is the same as offsetting the gains now at 15% , right?)

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Old 12-27-2010, 04:50 PM   #2
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3. offset the $5000 CG distribution using $5000 of the carryover losses. This leaves Bob with $112000 to carry over into 2011, $3000 to offset ordinary income in 2010 and no tax due on the CG distribution. Don't sell any of the MF shares. Keep the unrealized gains unrealized.

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Old 12-27-2010, 05:02 PM   #3
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My recollection is that wash sale rules only apply to losses, not to gains. So if Bob decides to harvest gains to utilize the capital loss carryover he could reinvest in the same securities since the sales resulted in gains and not losses.

That said, I agree with the previous post to not take any action now and just utilize $8,000 of the capital loss carryover in 2010. The remaining losses can always be used later and $3,000 can be used each year to offset ordinary income.
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distribution, gains, harvesting, tax

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