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   posted: Mar. 26, 2008 @ 1:02p

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I have a fair amount of capital losses from the tech bubble bust (over $100k). I invested in a mutual fund which has high cap gain (high portfolio turnover)...

However, when I got my 1099, I found that all the short term cap gains from the fund were also classified as Ordinary dividend (i.e. as ordinary income). A little research on the web shows that mutual funds have to treat short term capital gains as ordinary dividends (yikes).

So, in order to maximize my capital gains to offset against prior losses, is it ok to sell the mutual fund 1 day before the ex-dividend date and the (assuming) higher NAV converts into capital gains. Then buy the fund back 1 day after the ex-dividend date and repeat the cycle?

Anything against this strategy? I understand the fund might lose/gain in the 2 days that I am out of it, but i would pay 40% taxes 2 days later on the gain, while if I can get the capital gain then I can offset against my losses.

As a side note- I found most high dividend funds have a very small qualified dividend component (lower 15% tax) and most of it gets taxed as ordinary income. You have to call the mutual fund comapany to find out since the standard prospectus and finance web sites dont break this out which is a bummer since there is a big difference between qualified and ordinary dividends.

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   posted: Mar. 26, 2008 @ 2:52p

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If you do this buy/sell activity every year, won't all of your gains/losses be short term? Because your sell date is never more than 365 days away from your buy date.

Two points to keep in mind:
1. Mutual funds don't distribute all the gains in NAVs throughout the year. By doing the buying/selling like you specify, you realize the gains/losses in NAVs every single year (short-term).
2. Part of the gains distributed by each fund is long-term. If you buy/sell like you say you will, you lose the ability to realize this gain as long-term. Rather, your gains/losses in NAVs are all short-term.

Just some ideas I have. I am no professional, so please talk to tax professionals.

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   posted: Mar. 27, 2008 @ 3:49a

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Some things to keep in mind - for mutual funds held for 6 months or less, any losses are treated as long term losses. This is to keep you from generating short term losses by buying just ahead of qualified dividend or long term capital gain distributions. In addition, your loss under the same circumstances may be disallowed to the extent you received any tax-exempt income from that fund.

I think your strategy for getting capital gains instead of dividends should work however, unless I've overlooked something.

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