The current state of the economy along with COVID-19 has brought a lot of change to people’s financial lives. Whenever there is change, good or bad, involving money it can be a good time to sit down to review your finances. This includes reviewing your income, taxes, and investment portfolio.
In this article, I am going to discuss the concept of tax gain harvesting. Harvesting gains can be a powerful strategy to help you save money in taxes by strategically trading your portfolio. You can see my previous blog post on capital gains tax by clicking here. You can see my previous post on tax loss harvesting by clicking here.
Definition of Tax Gain Harvesting
I will reiterate from my previous post the basic concept of harvesting losses and gains. Tax loss harvesting and tax gain harvesting occur when you sell an investment and buy a different one in its place. You are harvesting the losses or gains by intentionally selling the position and buying a different position thereby keeping the money invested. The goal is to take the tax hit now, or capture the loss, allowing you to take advantage of either lower capital gains or income tax rates depending on your situation.
Benefits of Tax Gain Harvesting
The benefit of tax gain harvesting is to lock in your current tax rate. This can be beneficial if you have a year where you expect your income to be significantly less than usual. Some common scenarios would be a job loss or transition, going back to school, or starting a business. These scenarios can result in less taxable income for the household.
If you are in a lower tax bracket it can be beneficial to review your portfolio. If you have investments with large gains in a taxable account you can sell them to realize the gains at a lower tax rate. Your tax rate could be at 0%, 15%, or 20% for long term capital gains depending on your income. You are also resetting the cost basis at a higher amount and locking in the current tax rate by selling the position.
If you are single and your taxable income is below $40,000, or $80,000 if you’re married, then your long term capital gains rate is 0%. This means you can sell out of positions at a gain, and if you keep your taxable income below these amounts post sale, you will be taxed at 0%. See the 2020 long term capital gains tax rates below.