Tax Gain Harvesting Examples and FAQ

 

Should you Tax Gain Harvest? Maybe! Let’s explore if you can and how to harvest capital gains and find out if it is worth the hassle.

When is Tax Gain harvesting right for you?

Can You Harvest Gains?

First off, anyone can harvest tax gains.

What does it mean to harvest capital gains? All you do is sell your appreciated assets and lock in the price. Then, you can buy them right back if you want to, and you have re-set your basis. The goal, of course, is to save in capital gains taxes, but the first step is to sell your appreciated asset and buy it right back again. Just because you can harvest your tax gains doesn’t mean you should!

Should You Tax Gain Harvest?

So, should you tax gain harvest? Maybe! Especially if you have a low-income year.

Or, if you have a several-year (or 20-30 years in the case of retirement planning) tax projection that shows you will pay more in capital gains taxes if you sell in the future rather than selling now, you should tax gain harvest.

You should tax gain harvest either because you have access to the 0% Federal Capital Gains Tax bracket or because your capital gains taxes will be higher in the future.

The idea is that you want to pay the least in taxes over your lifetime. So, if you have a known expense in a few years that you plan to pay for with appreciated assets, you should do so if you can sell now and pay less in tax.

So now we know if you can and should, is it worth your time to tax gain harvest?

Is It Worth your Time to Tax Gain Harvest?

Generally, you want to pay the least tax possible on your assets. If you have some winners in your taxable brokerage account, optimizing assets for your children means you should never sell these and let your children get a step up in basis upon your death.

What if you could find a way to recognize the growth and not pay taxes? This is tax gain harvesting, which is made possible by the 0% Capital Gains tax bracket. If you need to review the 0% Capital Gains tax bracket, please check my blog on How Long-Term Capital Gains Stack On Top of Ordinary Income.

Next, ensure you understand how your brokerage account differs from your Roth and pre-tax retirement accounts from a tax perspective. You can read all about the tax efficiency of particular account types at Tax-Efficient Fund Placement and Asset Location Optimization.

If you can save in taxes and optimize your accounts, it can be well worth your time to tax gain harvest. So, next, how do you tax gain harvest?

How Do You Harvest Capital Gains?

So, how do you harvest capital gains? First, remember the goal is to recognize long-term capital gains on your taxes this year without paying additional money in taxes. Or to sell an asset and lock in capital gains at today’s capital gains rate rather than a higher one in the future.

Sell the asset and then purchase it again (if it is your desired asset). You have re-set your basis, and you will get a 1099-R showing the sales and the capital gains as a result.

Next, in April, you fill out your taxes, report the gain to the IRA, and pay the taxes that result (if any).

0% Long Term Capital Gains Bracket

The 0% Long Term Capital Gains tax bracket ends right around the 12% ordinary tax bracket. Taxable income of less than $44,625 ($89,250 for married couples) in 2023 falls into the 0% long-term capital gains tax bracket.

It is important to remember that this is taxable income rather than AGI. That means you get to “add” your standard (or itemized) deduction to the number to see how much room you have.

Thus, if you are single, you get ~40k plus a 12k standard deduction or have about 52k or room in your AGI to harvest capital gains.

You have ~80k plus a 25k standard deduction, or around 105k or harvesting room if married.

Remember, these have to be long- rather than short-term capital gains. This is because short-term capital gains are taxed at the ordinary tax rates rather than the (usually) preferred capital gains tax rate.

Let’s now look at some tax gain harvesting examples.

 

Tax Gain Harvesting Examples

Low Income

You have a low-income year and thus are in a lower tax bracket. This may be true if you are self-employed, in transition, or any other year when your income is low. If you

Say you have 10k of room in your 12% ordinary tax bracket. If you sell 20k of stock that you bought for 10k, you could recognize that 10k of long-term capital gains and never have to pay taxes on the basis again.

Offset Losses

If you have current or deferred capital losses, this is another example of tax gain harvesting opportunity.

You can net out your gain harvest at the amount you have in capital losses and pay zero in taxes. Remember, we recognize long-term capital gains, so both short-term and long-term capital losses work.

Or, if you really like a fund, you can re-set its basis. For example, say you have VTSAX, and it has a low basis. You can sell it and buy it right back. There are no wash sale rules for gain harvesting. This re-sets your basis.

Reduce Concentrated Positions

Here, the idea is to sell your winner and keep your free lunch (diversification).

This keeps your asset allocation in line and always lets you sell the winners. Direct indexing may be in order here as well.

Higher Future Capital Gains Tax Brackets

Say you are up against NIIT or the 20% capital gains tax bracket in the future; it might make sense to sell now and lock in the lower capital gains tax rates. This is a complicated topic, how capital gains stack upon ordinary income, and I suggest you read my blog on the subject if you need a refresher.

 

Tax Gain Harvesting and the Wash-Sale Rule

You don’t have to worry about the wash-sale Rule when you tax gain harvest. Wash-Sale is for tax loss harvesting only.

If you purchase something “substantially identical” 30 days before or after the sale date, the harvested loss isn’t allowed as a deduction.

 

Tax Gain Harvest: Frequently Asked Questions

Is the Harvest Amount included in the income that goes towards the 0% Long Term Capital Gains bracket?

You need to include the tax gain harvest in the calculation determining if your income is low enough to be eligible for the 0% Long Term Capital Gain bracket. It is not the basis you include, just the gain. So, for instance, if you had a 10k gain on 10k of stock, your basis is 10k, and you have 10k of embedded capital gains. The total is 20k; if you sell it, you pay 10k of capital gains. The amount you pay depends on where you fall in the capital gain tax bracket, understanding that capital gain income sits on top of ordinary income.

If you only have 5k of “room” in your 0 percent capital gain tax bracket, you will pay $0 on the first 5k and then 15% on the second 5k.

Are Capital Gains included in AGI and MAGI?

Remember that capital gains are included in AGI and MAGI. This affects deductions, credits, and other surcharges (such as NIIT, AMA Tax Credits, and IRMAA). This means there are rare times when a tax gain harvest may cost you more in taxes than you save! Taxes are complicated and often best if modeled using different amounts via tax software.

How do State Capital Gain Tax Rates affect harvesting?

Understand how your state taxes capital gains before you tax gain harvest. Some states have no tax on capital gains, while others give no preference for capital gains over ordinary income.

NIIT and Tax Gain Harvesting

NIIT limits are affected by harvesting gains, and you will pay the Obamacare 3.8% surcharge when applicable.

Single vs. Married Filing Status

The 0% Capital Gains Tax Bracket ends around 40k if you are single and 80k if you are married. These numbers increase slowly every year.

AGI or Taxable Income?

This is taxable income rather than AGI, so you get your standard (or itemized) deduction.

As a result, the AGI in order is ~52k for singles and ~104k if married.

Is Tax Gain Harvesting Worth It?

If you have massively appreciated assets in your brokerage account, tax gain harvesting won’t make much of a dent. However, consider tax gain harvesting when you have a low tax year or some capital losses to match.

If used appropriately, tax gain harvesting saves in taxes, can re-align risk, and optimize portfolios.

Short Term Capital Gains

You must wait at least a year to get Long-Term Capital Gain treatment. You cannot harvest short-term capital gains because you pay ordinary income rates.

AMT

AMT rarely affects tax gain harvesting but may become an issue to consider in 2026 when the Tax Cut and Jobs Act expires.

NIIT

Also known as the Obamacare 3.8% Medicare surcharge, this hits folks above 250k (200 if single). Make sure you don’t harvest yourself into NIIT.

Social Security

Tax gain harvesting will increase your provisional income and might cause increased taxation of your social security.

 

Summary: Tax Gain Harvest

Harvest your capital gains to reduce future taxes.

Generally, you will want to consider this near the end of the year, as then you will know what your income picture looks like for the year.

There are some cliff penalties to watch out for (IRMAA, ACA Premium tax credits) and perhaps some Tax Credits you need to be wary of. Still, otherwise, if you go over by one dollar extra, you just pay that one dollar at the higher capital gains tax bracket.

If you have a low-income year, re-set your basis by harvesting your gains. Or, if you have even higher income in the future, you might consider locking in your capital gains now. Either way, use the tax code to harvest your gains.