Tax-gain harvesting, explained

You’ve likely heard of tax-loss harvesting as a tax-mitigation strategy for your investments, but are you familiar with its opposite, tax-gain harvesting?

Tax-gain harvesting doesn’t receive the same amount of attention, but it can help lower the overall amount of taxes you pay over the course of your lifetime.

However, the strategy is complex and comes with risk, so consult with us and a tax professional to understand if it may benefit you. Here’s what you need to know:

In this article:

1. What is tax-gain harvesting?
2. When does it make sense to harvest capital gains?
3. How does tax-gain harvesting work?
4. Potential risks and special considerations for investors
5. Questions to discuss with us

What is tax-gain harvesting?

Tax-gain harvesting — also known as capital gains harvesting — is the strategic selling of appreciated assets in taxable accounts to take advantage of lower tax rates. The strategy is the inverse of tax-loss harvesting, which involves selling investments at a loss to potentially gain a tax benefit.

Tax-loss harvesting can help reduce your tax burden by offsetting taxes owed on other capital gains. Tax-gain harvesting, on the other hand, can help you take advantage of favorable tax rates on long-term capital gains. Tax-gain harvesting may seem counterintuitive because it involves paying more taxes now, but there are situations where that upfront payment can lead to greater tax savings over your lifetime.

When does it make sense to harvest capital gains?

Tax-gain harvesting can be a valuable strategy in the following scenarios:

• When you’re in a lower tax bracket than what you expect to be in your future: For example, maybe you project your retirement income will be higher than your current earnings or perhaps you’re taking a temporary leave of absence from your job and will end the year with a lower household income than normal. Maybe you own a business and are expecting a temporary dip in income due to the broader economic environment.
• When you know you will incur losses on other investments: You can use the losses to offset the gains and minimize, or potentially eliminate, any taxes due on the capital gains. Depending on your financial goals, you can immediately re-buy the stock you sold if you want to keep it. This is a strategy unique to tax-gain harvesting. Doing so resets your cost basis and potentially lowers your future tax burden.
• If you’re in the 0% long-term capital gains tax bracket: To be eligible for this tax bracket in 2024, your income must be lower than $47,025 if your tax filing status is single or $94,050 if married filing jointly. For many investors, it’s not common to qualify for the 0% long-term capital gains tax bracket, but during certain life stages, it can happen. For example, for many retirees, the time between when they stop working and when required minimum distributions (RMD) begin is often a period when income may be lower and they may be in the 0% capital gains bracket.

How does tax-gain harvesting work?

Consider the following scenario:

1. You are subject to a tax rate that you suspect is more favorable now, compared to the future.
2. You reach out to us to identify appreciated assets that may be worth selling and weigh the tradeoffs and benefits of such a transaction. You also determine whether harvesting these gains aligns with your financial goals, risk tolerance and time horizon.
3. In partnership with my team and your tax professional, you sell the assets and pay a lower tax rate on the realized capital gains, ultimately saving the amount you owe in taxes over the long term.
4. With guidance from my team, you reinvest those assets as appropriate to meet your financial goals, risk tolerance and time horizon.

Potential risks and special considerations for investors

• You may pay more taxes today than you would in the future. It’s impossible to predict whether taxes will go up or down in the future, so there’s always the risk that you sell at a point where your tax burden is higher.
• You could miss out on future gains from the asset. You may sell an asset that continues to appreciate. Similar to how it’s impossible to predict future tax rates, it’s not possible to know whether the asset you sell will appreciate in the years to come.
• You could incur unintended transaction costs or expenses related to the harvested tax gains.
• Selling investments solely to minimize taxes is generally unadvisable. Tax mitigation should be just one component of your investment strategy. When evaluating opportunities to sell assets, consider other factors as well, such as your financial goals, time horizon and risk tolerance.
• Retirement accounts don’t qualify: It’s only possible to harvest gains with assets that are held in taxable accounts. It doesn’t apply to transactions in qualified accounts, including 401(k) plans and Roth IRAs, because these accounts already offer tax advantages that allow you to sell and purchase assets without incurring a taxable event.

Let’s determine if tax-gain harvesting makes sense for you

Alongside your tax professional, we can help you determine whether there are strategic opportunities to harvest gains in your portfolio.