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?)