Tax gain harvesting

Tax-gain harvesting, as opposed to tax-loss harvesting, is the process of turning unrealized capital gains into realized capital gains at a specific time for tax purposes.

Tax gain harvesting
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, under the current tax regime 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.

Important notes
Keep in mind the following when considering realizing a capital gain.


 * 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.
 * Qualified dividends. If you hold shares less than 61 days and receive qualified dividends from those shares, they are not qualified dividends even though the fund company may claim to be qualified dividends. See Mutual Fund Ordinary Dividends for more details.  Disqualification of qualified dividends may outweigh the benefit of tax gain harvesting in some cases.
 * To the extent that gain realization will increase reported adjusted gross income (AGI), the higher AGI can reduce available itemized deductions. Certain itemized deductions have percentage AGI thresholds, such as medical expense deductions (greater than 7.5% AGI), and certain miscellaneous deductions (greater than 2% AGI) that will be reduced by a higher AGI.
 * If you are receiving Social Security benefits any realized capital gain may increase the amount of your Social Security that is taxed. As more of your Social Security becomes taxable, there is also the possibility that all or part of the capital gain would be pushed into a higher tax bracket.  In some cases, this can result in a marginal tax rate of 47.5%.