It would be good to have a Wiki page on tax-gain harvesting to complement the page(s) on tax-loss harvesting that exist. Here's some starting text:
Tax-gain harvesting, similar to tax-loss harvesting, is the process of turning unrealized capital gains into realized capital gains at a specific time for tax purposes.
In general, it is considered advantageous to delay the realization of capital gains as long as possible. Consequently, tax-gain harvesting is often counter-intuitive and less frequently discussed. However, there are specific circumstances under which it can be advantageous. For example:
- An investor in the 10% or 15% bracket may choose to claim capital gains in 2012 or earlier, to take advantage of the 0% capital gains rate which is scheduled to terminate after 2012.
- An investor in a higher tax bracket may choose to claim capital gains in 2012 or earlier, to avoid taxation under the currently-scheduled higher capital gains rates for 2013 and forward.
- An investor in the lowest tax bracket (currently 10%) may choose to accelerate capital gains under the assumption that he/she will be in a higher tax bracket in future years. (Current law affords a lower tax rate to capital gains in the lowest tax bracket even after 2012.)
Consider the following scenario:
In 2009, Alice and Bob buy 10 shares of Fund A for $100/share. Each has $1,000 basis in the fund.
In 2012, Fund A is worth $200/share. Alice sells her shares of Fund A, realizing a $1,000 capital gain. Because Alice is in the 15% tax bracket, she owes no taxes on this gain. The next day, she repurchases 10 shares of Fund A at the same price.
In 2014, Fund A is worth $250/share. Alice and Bob both sell their shares. Alice has realized another $500 gain, incurring $100 in taxes. Bob has realized a $1,500 capital gain, incurring $300 in taxes.
Bob has incurred triple the taxes on the same capital gain by not tax-gain harvesting.
Some important notes:
- The "wash sale rule" does not apply to tax-gain harvesting. The definition of a wash sale specifically applies it only to securities sold at a loss; securities sold at a profit may immediately be repurchased without tax consequences.
- The 2012 lower capital gains rate only applies to taxpayers who are in the 15% bracket even when the amount of the capital gain is included. A taxpayer with $20,000 in taxable income and $100,000 in unrealized gains would provoke a substantial tax bill by attempting to tax-gain harvest the full amount of their capital gains.