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How to Harvest Tax-Free Gains on Securities Skip to content

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Don't Miss Out on Tax-Free Money From Stocks

Tax-gain harvesting can help you, even if you're hesitant to sell

man looks at computer screen display of stock  growth over time

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As we approach the end of the year, it's time to start thinking about tax moves to save you money. You've probably heard the term “tax-loss harvesting” but may not be familiar with “tax-gain harvesting.” This is where you recognize long-term capital gains on your investments and pay no federal taxes. Let me explain why this is good for so many people, especially retirees.

Tax-gain harvesting is pretty much the opposite of tax-loss harvesting.

In tax-loss harvesting you sell securities with losses and recognize capital losses to offset gains or up to a net deduction of up to $3,000 for married filing jointly or single, or $1,500 for married filing separately. You can carry forward your losses to future years. You can't buy that same security back for the next 30 days or the IRS disallows that loss in what they call a wash sale. But with stocks and bonds nearing an all-time high, you may not have any tax-loss harvesting opportunities.

Tax-gain harvesting is when you sell a security at a gain.

If you've held that security for more than one year, the federal government taxes it as a long-term capital gain. That tax rate happens to be at zero percent for married couples filing jointly with up to $78,750 in taxable income, or a single taxpayer with up to $39,375 in taxable income.

Since the 2019 standard deduction is $24,400 for married filing jointly and half that for singles, this means a married couple filing jointly can earn at least $103,150 and not pay federal income taxes on these long-term capital gains. Those filing single have half of this amount.


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Here's how it works.

Say you are married filing jointly and have $80,000 in income before taking the standard deduction. You own a low-cost stock index fund with a large unrealized long-term capital gain that you don't want to sell. Do it anyway.

If you sold enough to recognize a long-term gain of $23,150 (to get you to that $103,150), you pay no federal long-term capital gains tax. And as soon as you sell, you can immediately buy it back again. You don't have to wait 31 days as there is no wash-gain rule — only a wash-loss rule.

The reason you do this is that it resets the cost basis to that higher price and you'll have less of a gain when you later sell it to live on the proceeds. Your income may be much greater in future years if you've delayed taking Social Security (typically the right thing to do) and will later have to take the required minimum distributions from your IRA and 401(k) accounts.

This zero percent tax rate is only for federal taxes. You will likely end up paying state income taxes, but you'd probably have to pay that eventually, and state taxes are typically lower than federal taxes.

Other complications could also arise, says Mike Piper, author of Taxes Made Simple. He points out one example: If you are buying your health insurance though the Affordable Care Act exchange and receive a subsidy, that capital gain could reduce or eliminate that subsidy. Seek good tax advice for your specific situation.

The federal government doesn't have too many zero tax rates, so if you qualify and it saves you money, harvest those gains. It's a heck of a lot more fun than tax-loss harvesting.

Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colorado. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.

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