Capital Gain Harvesting

It is that time of the year again…it’s December and time for last-minute tax planning and optimization.   You may typically hear about tax loss harvesting this time of year.  Tax loss harvesting is selling securities at a loss to recognize a tax capital loss which then permits an offset to some of the year’s capital gains.  It is a great strategy and can really defer tax, especially if you have short-term gains recognized and short-term losses unrealized.  Tax deferral is one of the smartest strategies out there… only to be beaten by permanent tax avoidance!

Capital gain harvesting is a strategy that involves selling securities or other assets in order to realize capital gains and potentially lock in a reduced or zero tax liability. It involves selling securities or assets that have increased in value, resulting in a capital gain. A capital gain of course occurs when there is a difference between the price at which the asset was purchased and the price at which it is sold.

A recent example I had was as follows:  A client retired in April 2022 and had roughly $25,000 of wage earnings for the first three months of the year.  They have been living off savings and have not yet started taking social security or taxable retirement distributions.  They are able to sell securities triggering a $70,000 capital gain. Despite the gain, their collective income for the year will be in the bottom two tax brackets and they will pay zero federal taxes as their wage income is offset by the standard deduction.  In the bottom two tax brackets, the long-term capital gain tax rate is zero and not the 15% most people consider.

Rebalancing is another thing to consider because it forces one to buy low and sell high; investors might use capital gain harvesting as a way to rebalance their portfolio and shift their investments to different asset classes or sectors.  Prudent risk management involves reducing exposure when certain portfolio metrics are hit.

If your income is below $100,000 as a married couple, tax gain harvesting may be a great strategy for you.

Please reach out to the our team to learn more.