Mutual fund investors should try these tax-wise tactics:
Sell the funds where you have a paper loss. Realized capital losses can offset capital gains. Net capital losses can be deducted (up to $3,000 per year) and carried forward to offset future gains.
After you sell, reinvest the proceeds in similar funds with large built-in losses. Subsequently, your new fund is unlikely to distribute capital gains, perhaps for many years. Such a maneuver won’t violate the wash-sale rules so you’ll get to take the capital losses.
Suppose, for example, you sell Fidelity Magellan, taking tax losses, and reinvest the proceeds in Fidelity Contrafund II. The latter fund had built-in losses equal to 354 percent of its portfolio value, at the end of the first half of 2003, according to Morningstar Inc., Chicago, so any trading gains will be tax-free for several years.
Your portfolio will be about the same yet you’ll be in a position to enjoy twin tax benefits.
