Huge Capital Gains carryover - ideas?

You can use them forever at 3K per year to offset income. There was some talk of congress COLA indexing this 3K, or increasing it for retirees who have different income conditions. If you ever start investing again you can buy "unrealized gains" in mutual funds in the future to cut taxes. I've done some of that myself. You find unrealized gains in previews of year-end distributions or growth stocks inside prospectii (e.g. lots of GOOG).

You can use them forever at 3K per year to offset income. There was some talk of congress COLA indexing this 3K, or increasing it for retirees who have different income conditions. If you ever start investing again you can buy "unrealized gains" in mutual funds in the future to cut taxes. I've done some of that myself. You find unrealized gains in previews of year-end distributions or growth stocks inside prospectii (e.g. lots of GOOG).

How does that help? Suppose I buy a mutual fund for $1,000 of which $200 is unrealized gains. They realize it, and pay me $200 in capital gains. That offsets $200 of capital loss; but my shares in the fund are now worth only $800, so I have the same loss if I sell them (and if I don't sell them, and wait for the $800 to appreciate back to $1,000, I might just as well have bought $800 worth of any other mutual fund and waited for it to appreciate.) Seth

The benefit is that you don't have to pay tax on the distributed gain, because it just eats away at the huge carryover you have. Basically, if you have so much carryover that you'll never use it up, you essentially never have to pay capital gains tax again. Which means that you can ignore them when making investment decisions.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

The value of your shares is unchanged by this year end tax impact. At the same time, your basis increases by the $200 of taxable capital gain.

Since your basis in the fund is now $1,200, the first $200 of appreciation (from your original $1,000 investment) will be tax free.

How does that differ from me buying a different mutual fund for $800 and keeping the other $200 in cash? Either way, I have $200 in cash and $800 in a mutual fund; if I sell, I have the same carryforward ($200 used and restored in the $1000 purchase, untouched in the other); if I sell later when it's up to $1000, I still have the same carryforward in both cases.

But that doesn't help me much; the issue was using it up.

(Can a buy/sell agreement produce capital gains? That is, I buy something for $1,000 now, with a contract that says you'll buy it back for $1,100 in two years. Is the $100 capital gain or interest?) Seth

Huh? Do you think I can buy a mutual fund for $1,000, get $200 in capital gains payouts, and have the shares still worth $1,000? I'd love to do that all year, I'd get rich real fast.

Oh, are you assuming that I re-invest the $200? Then I end up with $1,000 worth of mutual fund, with a basis of $1,200, and $200 of capital loss used up. But if I sell, I get the $200 capital loss back, so I still don't see the benefit.

The first umpteen thousand (full capital-loss carryforward) is tax free. How did buying the fund with capital gain payout benefit me more than a similar fund without the payout? Seth

You already said that you can't use it up. Assuming that's true, the best you can do is take advantage of the carryover to give yourself more flexibility in buying and selling securities. Under normal circumstances, when you're deciding whether to buy or sell a security, you have to worry about how it will impact your taxes that year. If you think a stock or mutual fund has reached its peak you usually want to sell, but you might put it off because you don't want to pay the capital gains tax that year. Or if you're thinking about buying a mutual fund, you usually want to time it so you don't buy right before it declares a large capital gain distribution. But if you have this unquenchable capital loss carryover you can buy and sell whenever the price is right. You don't have to worry about the tax consequences.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA