What Is Tax Gain Harvesting?

If you are familiar with tax loss harvesting, tax gain harvesting is just the opposite. It looks at tax efficiencies available for gains rather than losses. We’ll walk through an introduction with some examples to give you a good idea of what tax gain harvesting is and when to use it.

Tax Gain Harvesting Introduction

Unlike tax loss harvesting, tax gain harvesting focuses on tax efficiencies when taking gains, specifically, long-term gains. By working the tax brackets on long-term capital gains, an investor can realize tax efficiencies. 

Below are the long-term capital gains rates for 2021.

For those in the highest tax bracket, it doesn’t mean that all of your long-term capital gains will be taxed at 20%. Gains are taxed at each level, depending on your taxable income. Examples are the best way to see how this works, so let’s look at a few.

An investor files single and makes $50,000 per year. The standard deduction is $12,550. Taking the standard deduction reduces taxable income to $37,450. This leaves $2,950 available for tax-free, long-term gains. 

This investor has $15,000 in long-term gains. $2,950 of that will be tax-free. The remaining $12,050 will be taxed at 15%.

Another investor’s tax status is married filing jointly. He makes $250,000 per year and has $25,000 in long-term gains. His gains will be taxed at the 15% rate.

If the same investor had $275,000 in long-term gains, it would push into the 20% bracket. Here’s the breakdown:

$525,000 total income

$250,000 in wage income

$501,600 - $250,000 = $251,600 available for 15% tax bracket.

Of the $275,000, $251,600 is taxed at 15%. The remaining $23,400 is taxed at the 20% rate.

Resetting The Basis

If you’re holding a long-term position and want to keep that position, you can still take advantage of tax gain harvesting. By selling some of the position, you realize a gain and take some profits off the table. Then you can buy back some of the stock/fund to re-establish the original or a lower allocation.

Selling some of your long-term holdings and then buying back the same stock/fund doesn’t trigger the wash sale rule. However, it will reset your cost basis in the position. Meaning the basis will adjust up.

When To Use Tax Gain Harvesting

There are a few scenarios that can benefit from tax gain harvesting. One is when you have lower taxable income. With a lower taxable income, there is more room in the tax brackets you can fill up with long-term gains.

Retirees may be the best group to take advantage of tax gain harvesting. A person who has no wage income hasn't yet started Social Security, and is below 72 years old when required minimum distributions from retirement accounts haven't started, will have nearly all of the tax brackets available to use for long-term gains. This means much of the lower tax-free bracket should be available.

Tax gain harvesting is only available in taxable accounts. It isn't available in retirement accounts such as 401(k)s or IRAs since those are not taxable accounts. For 401(k)s and IRAs, you'll pay taxes on distributions no matter what you did in the account. For Roth IRAs, they grow tax-free, so there is no advantage in trying to use tax gain harvesting.

Like tax loss harvesting, it’s best to work with a tax advisor when utilizing tax gain harvesting.