Tax Gain Harvesting: Saving Taxes By Selling High

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Did you know that you can save on taxes by selling investments that are up? It sounds crazy but it all comes down to taking advantage of the capital gains tax brackets.

How Capital Gains Taxes Work

Selling stocks, mutual funds, ETFs, and other investments results in a capital gain.

When you hold an investment for less than a year before selling it, your gain is called a short-term gain. Short-term gains are taxed according to your regular tax bracket.

When you sell after holding an investment for more than a year, your gain is called a long-term gain. Long-term gains have special tax brackets.

  • You pay 0% on long-term gains if your total income (not just capital gains) is up to $44,625 as a single filer or $89,250 as a joint filer.
  • You pay 15% if your income is from $44,626 to $492,300 as a single filer or $89,251 to $553,850 as a joint filer.
  • You pay 20% if your income is higher.

(The above income ranges are for 2023 and increase with inflation each year.)

What is tax gain harvesting?

Tax gain harvesting is selling an investment at a gain to claim the capital gain on your taxes this year.

If you want to stay invested, you can immediately buy the same investment back. Unlike tax loss harvesting, there’s no wash sale rule to worry about with tax gain harvesting.

But remember, to do this, it has to be shares that you’ve held longer than a year so the long-term capital gains tax rate applies.

Why do tax gain harvesting?

There are several ways to benefit from tax gain harvesting:

  • Take advantage of the 0% capital gains tax bracket whenever you’re eligible
  • Take advantage of the 15% bracket if you’re usually in the 20% bracket
  • Take advantage of losses from selling other investments that will offset your gains
  • Pay taxes at a lower rate today if you expect tax rates to go up in the future
  • Smooth out your taxes by recognizing a smaller gain each year instead of a huge gain at the end

What exactly do you do?

Let’s say your income for the year is $30,000 as a single filer. That means you can take up to $14,625 in capital gains and stay in the 0% tax bracket.

You have an ETF in a taxable account that’s up $10,000. If you sell it, you’ll pay no capital gains tax even though you had a $10,000 gain.

If you want to stay invested in that ETF, you can immediately repurchase it.

What are the risks of tax gain harvesting?

There are several potential risks or drawbacks of tax gain harvesting:

  • Capital gains do increase your AGI and may affect your eligibility for other tax credits, tax deductions, or certain government benefits
  • Between changes in your income and tax brackets, you never know for sure if your taxes will be higher or lower in the future
  • When you sell an investment, it could increase in price before you’re able to buy it back
  • Depending on your income, Alternative Minimum tax or Net Investment Income Taxes may apply
  • State tax rules may vary, and you may also later choose to move to a state with better taxes

Should you do tax gain harvesting?

As you can see, there are a lot of moving parts. It’s important to carefully predict your income and check the rules for any tax deductions or credits you use. If you need help, talk to your tax advisor.

Did you know that you can save on taxes by selling investments that are up? It sounds crazy but it all comes down to taking advantage of the capital gains tax brackets.

How Capital Gains Taxes Work

Selling stocks, mutual funds, ETFs, and other investments results in a capital gain.

When you hold an investment for less than a year before selling it, your gain is called a short-term gain. Short-term gains are taxed according to your regular tax bracket.

When you sell after holding an investment for more than a year, your gain is called a long-term gain. Long-term gains have special tax brackets.

  • You pay 0% on long-term gains if your total income (not just capital gains) is up to $44,625 as a single filer or $89,250 as a joint filer.
  • You pay 15% if your income is from $44,626 to $492,300 as a single filer or $89,251 to $553,850 as a joint filer.
  • You pay 20% if your income is higher.

(The above income ranges are for 2023 and increase with inflation each year.)

What is tax gain harvesting?

Tax gain harvesting is selling an investment at a gain to claim the capital gain on your taxes this year.

If you want to stay invested, you can immediately buy the same investment back. Unlike tax loss harvesting, there’s no wash sale rule to worry about with tax gain harvesting.

But remember, to do this, it has to be shares that you’ve held longer than a year so the long-term capital gains tax rate applies.

Why do tax gain harvesting?

There are several ways to benefit from tax gain harvesting:

  • Take advantage of the 0% capital gains tax bracket whenever you’re eligible
  • Take advantage of the 15% bracket if you’re usually in the 20% bracket
  • Take advantage of losses from selling other investments that will offset your gains
  • Pay taxes at a lower rate today if you expect tax rates to go up in the future
  • Smooth out your taxes by recognizing a smaller gain each year instead of a huge gain at the end

What exactly do you do?

Let’s say your income for the year is $30,000 as a single filer. That means you can take up to $14,625 in capital gains and stay in the 0% tax bracket.

You have an ETF in a taxable account that’s up $10,000. If you sell it, you’ll pay no capital gains tax even though you had a $10,000 gain.

If you want to stay invested in that ETF, you can immediately repurchase it.

What are the risks of tax gain harvesting?

There are several potential risks or drawbacks of tax gain harvesting:

  • Capital gains do increase your AGI and may affect your eligibility for other tax credits, tax deductions, or certain government benefits
  • Between changes in your income and tax brackets, you never know for sure if your taxes will be higher or lower in the future
  • When you sell an investment, it could increase in price before you’re able to buy it back
  • Depending on your income, Alternative Minimum tax or Net Investment Income Taxes may apply
  • State tax rules may vary, and you may also later choose to move to a state with better taxes

Should you do tax gain harvesting?

As you can see, there are a lot of moving parts. It’s important to carefully predict your income and check the rules for any tax deductions or credits you use. If you need help, talk to your tax advisor.

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