Tax-Gain Harvesting

Most people are familiar with the concept of Tax-Loss Harvesting, where you sell positions in your taxable accounts that are operating at a loss and reinvest those proceeds into a similar (not the same or substantially identical) security. This enables you to keep your investment strategy in line, while capturing the capital loss of that security to offset realized capital gains you may have that tax year or use as an income tax deduction (up to $3,000 / year).

However, not as many people are aware of the opposite strategy, where you “harvest” or intentionally realize Long-Term Capital Gains (LTCGs) for tax benefit purposes.

**NOTE: Long-Term Capital Gains are gains associated with a security held for at least one year. These gains receive favorable tax treatment when sold compared to Short-Term Capital Gains, which are gains associated with a security held for less than one year.

I’ll illustrate how this works and the potential benefits it may have, but in short, certain individuals / households may find themselves in tax situations where they can realize LTCGs at 0%, compared to the usual 15% or 20%. Ultimately, allowing them to reset their cost basis on those shares and reduce the capital gains liability within their taxable accounts.

2023 Long-Term Capital Gains Tax Rates:

Example of Tax-Gain Harvesting Strategy

Please note: This is a hypothetical situation and does not reflect any actual situation, investor, or investment performance. It is provided for illustrative purposes only. There can be no assurance that the results depicted in this blog can be achieved. Actual results may vary substantially.

Let’s walk through an example of how this would work. We’ll assume you are married, file jointly, and your 2023 Estimated Taxable Income is $50,000 (AGI minus their standard or itemized deduction). We’ll also assume you have the following taxable account:

As you can see in the first chart, the Married, Filing Jointly (MFJ) 0% Tax Rate for LTCGs goes up to $89,250 of Taxable Income.

In our example, we’re assuming the couple’s 2023 Taxable Income is $50,000.

This would leave them the capacity for additional Long-Term Capital Gains of $39,250 before moving into the 15% LTCG tax rate.

For simplicity purposes, let’s assume your shares are realized in an average cost manner, where each dollar sold represents $0.60 cost basis and $0.40 long-term capital gain. 

If we want to realize an additional $39,250 in LTCGs, we could do the following calculation:

$0.40x = $39,250

x = $39,250 / $0.40

x = $98,125

Selling $98,125 in this scenario would realize $39,250 in LTCGs. As mentioned above, since these are capital gains, not losses, you are able to reinvest these proceeds right back into that same security, so your investment strategy remains unaffected. After these transactions, your taxable account would now be:

With this new account situation, should you find yourself in a higher income situation in later years, you now have $39,250 less in capital gains liability. At the 15% LTCG rate, that’s $5,887.50 less in paid taxes. At the 20% LTCG rate, that’s $7,850 in tax savings. That can be a substantial amount. Especially, if this strategy is utilized for multiple years.

Most commonly, this strategy may be available for retirees early on in their “Gap” years (years after retirement and before RMDs), and may find themselves in a position to take advantage of this. They may be living entirely off of cash savings or social security, and they haven’t began to dip into their retirement accounts yet, so their taxable income is rather low. However, even certain individuals during their accumulation years may find themselves in a taxable situation to take advantage of this. Whether they simply had a low income year, took a year off, or had other circumstances that allowed them to reduce their taxable income (deductions, losses, expenses, etc.).

Again, this is a very simplistic illustration to help gain an understanding of the concept and the potential benefit of this strategy. It’s best to be done towards year-end when you have a clearer picture of your income for that given year. It’s also best to do this with the help and supervision of an advisor or accountant. Each individual’s / household’s tax situation is different and unique. Depending on the situation, realizing additional income may phase you out of certain deductions, trigger certain surtaxes, increase the taxability of your Social Security, or phase you out of certain tax credits. But when done properly, there can be significant tax benefits in implementing a Tax-Gain Harvesting strategy.

Additional Notes

-        This does not apply to tax-advantaged accounts (i.e., 401(k)’s, 403(b)’s IRAs, Roth IRAs, etc.)

-        This does not apply to Short-Term Capital Gains (securities held less than 1 year)

-        Mentioned in the article, but another reminder that increasing income may increase taxes elsewhere by phasing you out of deductions / credits or triggering surtaxes

Ellis Investment Partners, LLC (EIP) is an investment advisor in Berwyn, PA. EIP is registered with the Securities and Exchange Commission (SEC). Registration of an Investment Adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the commission. EIP only transacts business in states in which it is properly registered or is excluded from registration. A copy EIP’s current written disclosure brochure filed with the SEC which discusses among other things, EIP’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov The views expressed represent the opinion of Ellis Investment Partners, LLC (EIP) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is derived from proprietary and nonproprietary sources which have not been independently verified for accuracy or completeness. While EIP believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimate, projections, and other forwardlooking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Past performance of various investment strategies, sectors, vehicles and indices are not indicative of future results. There is no guarantee that the investment objective will be attained. Results may vary. There is no guarantee that risk can be managed successfully. Investments in securities involve risk, including the possibility for loss of principal. EIP does not provide tax or legal advice. You should seek counsel from your tax or legal adviser for your specific situation. Drew Schaffer is an independent Investment Advisor Representative of Ellis Investment Partners, LLC (EIP). Financial Planning and Investment Advisory Services are offered solely by EIP, a registered Investment Advisor, 920 Cassatt Road, 200 Berwyn Park, Suite 115, Berwyn, PA 19312, 484-320-6300.