I was looking at the wiki article on TLH today. Nice, but one paragraph caught my eye as stale and muddle-headed:
Short-term capital loss due to tax-exempt interest. If you have short-term capital loss due to tax-exempt interest from a mutual fund held less than 6 months or less, you cannot claim the loss. You can still claim a part of the loss due to market movements, such a rising interest rate. See Publication 564 (2007), Mutual Fund Distributions and Short-Term Capital Losses for more details.
The stale part is that it refers to Pub. 564 which has been discontinued (and the link is dead anyway).
The text is also either outright wrong or misleading (depending on how fussy you are), and leaves out significant details. The link to fairmark is fine as long as readers understand that "capital gain dividends" are what most of us, including the wiki, refer to as "capital gain distributions".
The full details are on p. 56 of the current Pub. 550, in the subsection titled "Loss on mutual fund or REIT stock held 6 months or less". Here's my attempt to compress the story into a couple of sentences:
If you sell shares of a mutual fund at a loss, and those shares have been held for 6 months or less, then there are special rules that may alter the loss you claim. First, if those shares produced any tax-exempt interest, then the loss is reduced, dollar for dollar, by that interest. Second, if those shares were held while the fund distributed (long term) capital gains, then the loss is treated as a long term loss up to the dollar amount of the distribution those shares produced.
I'm not 100% clear if the last sentence really applies only to long term cap gain distributions, or both long and short. Whether it does or not should be largely moot since this will rarely affect a Boglehead.
One reason for thinking that the intent is long-only is that short term capital gains distributions are not reported as short term capital gains on one's tax return, but rather as ordinary non-qualified dividend income. Second, the intent of the rule is to circumvent any tax advantage that can be gained by buying shortly before and selling after an anticipated distribution. In this case, not only can you not gain an advantage, you might end up making things worse. If your recently purchased shares of Fund X generate a $1000 short term gains distribution, and you sell afterwards, then in some sense your capital loss is $1000 larger than it would otherwise have been. Whether you treat that extra loss as long or short term won't change the fact that you have $1000 more in ordinary income to report. The best you can hope for is that the extra $1000 in losses cancels it out. Depending on what else you have in capital gains and losses, it might not.