Understanding Tax Gain Harvesting
Tax gain harvesting is a proactive tax planning strategy that can reduce future tax liabilities for investors who currently fall within the 10 percent and 12 percent federal income tax brackets. Many investors have heard of tax loss harvesting. Tax gain harvesting is the opposite approach and can be especially useful during years when your taxable income is lower than usual.
This article explains what tax gain harvesting is, why it may be beneficial, and how it can be used as part of an intentional year end tax plan.
What Is Tax Gain Harvesting
Tax gain harvesting occurs when you intentionally sell appreciated investments to recognize long term capital gains in a year when your tax rate is favorable. Taxpayers in the 10 percent and 12 percent income tax brackets may qualify for a zero percent federal tax rate on long term capital gains. When used correctly, this strategy allows investors to realize gains with little or no federal tax owed in the current year.
The goal is to take advantage of your current tax bracket and reposition your investments for long term efficiency.
Why Tax Gain Harvesting Can Be Valuable
1. Realize Gains at a Zero Percent Tax Rate
If your taxable income keeps you within the 10 percent or 12 percent bracket, your qualified long term capital gains may be taxed at zero percent for federal purposes. Realizing gains in this bracket allows you to lock in appreciation without increasing your federal tax liability.
This can be especially valuable if you expect your income or tax rates to increase in future years.
2. Increase Your Cost Basis for Future Years
When you sell an investment with a gain and then repurchase it, your cost basis resets to the new purchase price. This higher basis can reduce taxable gains in future years when you may be in a higher bracket.
A basis reset can also reduce the tax impact of future portfolio rebalancing.
3. Make Use of Low Income Years
Income can vary from year to year. Retirement transitions, changes in employment, years with significant business deductions, or other life events can temporarily lower your taxable income. These lower income years offer opportunities to realize long term capital gains with little or no federal tax due.
How Tax Gain Harvesting Works
The general process is straightforward.
1. Review Your Portfolio for Appreciated Positions
Identify long term holdings in taxable accounts that have built in gains and that fit your long term investment strategy.
2. Confirm Your Eligibility for the Zero Percent Rate
Review your estimated taxable income to ensure you remain within the 10 percent or 12 percent tax brackets. Also confirm that the positions have been held for more than one year so the gain qualifies for long term treatment.
3. Sell the Investment to Recognize the Gain
The sale creates a taxable long term gain. If you qualify for the zero percent bracket, the federal tax owed on this gain may be zero.
4. Reinvest the Proceeds
If the investment still aligns with your long term goals, you can buy it back immediately. Wash sale rules apply only to losses, not to gains, so there is no waiting period required.
When Tax Gain Harvesting May Make Sense
You may benefit from this strategy if:
You expect to remain in the 10 percent or 12 percent bracket for the current year
You hold appreciated investments that you plan to keep long term
You anticipate moving into a higher tax bracket in future years
You want to proactively reduce the tax impact of future sales or rebalancing
You are early in retirement and have several low income years ahead
Important Planning Considerations
Only long term gains qualify for the zero percent rate.
Investments must be held for more than one year.State tax treatment may vary.
Some states tax capital gains even if federal tax is zero.Be mindful of income thresholds.
Realized gains increase your taxable income. Excess gains could inadvertently push you into a higher capital gains bracket.Reinvestment should align with your overall investment plan.
Consider long term allocation decisions before reentering positions.
Final Thoughts
Tax gain harvesting can be an effective strategy for taxpayers in the 10 percent and 12 percent tax brackets. It allows investors to take advantage of lower current tax rates and increase the cost basis of long term holdings, reducing future tax exposure. This strategy works best when incorporated into a coordinated tax and investment plan.
If you would like to discuss whether tax gain harvesting makes sense for your specific situation, our office is available to help you evaluate your options.
