I had asked a previous question about moving money between mutual funds without taxation due to the 0% capital gains rate for those in low tax brackets.
However, I realized that this 0% rate actually allows much more than that. It allows you to step up your cost basis for free every year. If I understand right, as long as you remain in the 15% tax bracket or lower (currently taxable income up to $36k for a single filer), capital gains are taxed at 0%. This would mean that, at the end of every tax year, if any of your investments had increased in value, you could sell as much as possible while remaining under this limit and then immediately buy it back, thereby stepping up your cost basis and reducing future tax liability. If these investments were mutual funds that could be traded for free, you would get this tax benefit with zero cost. It would be similar to loss harvesting, only it's gain harvesting, realizing a gain tax-free.
By searching, I was able to find a couple web pages mentioning this loophole (e.g., this one). But given how often you see "10 Tips to Reduce Your Tax Bill"-type articles in the newspaper, online, etc., I was surprised that I had never seen this one mentioned before. With deductions and exemptions, a married couple could have taxable income in the 0% range while earning well more than the median household income in the USA (roughly $50k according to Wikipedia). This would seem to mean that more than half the US population could potentially reduce their future capital gains taxes for free (if they had capital gains to realize).
So basically what I'm wondering is, is there a catch? Is this loophole for real? If so, why isn't it more widely known (compared to the various "tax tips" you see around about making IRA contributions and the like)? Why doesn't everyone do this? Is it just that most people earning below the 0% limit don't have much in the way of investments in taxable accounts, so they can't make use of the loophole?