Smart Wrap in Vim

There is a patch for this, but it's been lingering for years and last time I checked did not apply cleanly. See the "Correctly indent wrapped lines" entry in http://groups.google.com/group/vim_dev/web/vim-patches -- I really wish this would get in the mainline.

Update: that link seems to have bitrotted. Here is a more up to date version of the patch.

Update 2: it has been merged upstream (as of 7.4.345), so now you only have to :set breakindent.

This feature has been implemented on June 25, 2014 as patch 7.4.338. There followed a few patches refining the feature, last one being 7.4.354, so that's the version you'll want.

:help breakindent
:help breakindentopt

Excerpts from vim help below:

'breakindent'     'bri'   boolean (default off)
                          local to window
                          {not in Vi}
                          {not available when compiled without the |+linebreak|
                          feature}
        Every wrapped line will continue visually indented (same amount of
        space as the beginning of that line), thus preserving horizontal blocks
        of text.

'breakindentopt' 'briopt' string (default empty)
                          local to window
                          {not in Vi}
                          {not available when compiled without the |+linebreak|
                          feature}
        Settings for 'breakindent'. It can consist of the following optional
        items and must be seperated by a comma:
                  min:{n}     Minimum text width that will be kept after
                              applying 'breakindent', even if the resulting
                              text should normally be narrower. This prevents
                              text indented almost to the right window border
                              occupying lot of vertical space when broken.
                  shift:{n}   After applying 'breakindent', wrapped line
                              beginning will be shift by given number of
                              characters. It permits dynamic French paragraph
                              indentation (negative) or emphasizing the line
                              continuation (positive).
                  sbr         Display the 'showbreak' value before applying the 
                              additional indent.
        The default value for min is 20 and shift is 0.

Also relevant to this is the showbreak setting, this will suffix your shift amount with character(s) you specify.

Example configuration

" enable indentation
set breakindent

" ident by an additional 2 characters on wrapped lines, when line >= 40 characters, put 'showbreak' at start of line
set breakindentopt=shift:2,min:40,sbr

" append '>>' to indent
set showbreak=>>   

Note on behaviour

If you don't specify the sbr option, any showbreak any characters put appended to the indentation. Removing sbr from the above example causes an effective indent of 4 characters; with that setting, if you just want to use showbreak without additional indentation, specify shift:0.

You can also give a negative shift, which would have the effect of dragging showbreak characters, and wrapped text, back into any available indent space.

When specifying a min value, the shifted amount will be squashed if you terminal width is narrower, but showbreak characters are always preserved.