Why You Might Harvest Gains Now
Here's an unconventional approach for investors who want to minimize taxes on investment profits. Instead of focusing on harvesting losses at the end of the year, you might consider realizing gains now by selling some of your winning positions. You could leave the losers in your portfolio to use next year or later.
You should not completely discount the tax benefits of capital losses, which you can use to offset capital gains plus up to $3,000 of highly taxed ordinary income. Losses can be especially valuable if you already realized short-term capital gains—which will be taxed as ordinary income—earlier this year.
1. A maximum long-term rate of 15% or 20%. If you've owned stock for more than one year, the maximum tax rate on a long-term capital gain is only 15% or 20% if you're in the top tax bracket of 39.6% for ordinary income. No matter what—you won't pay a capital gains tax of more than 20%.
2. The possibility of a 0% rate. Even better, if you're in one of the two lowest ordinary income tax brackets of 10% or 15%, the tax rate on your long-term capital gains is 0%. This rule also can apply to part of your gains even if your income exceeds the upper limits of those brackets. For instance, if you realize a long-term capital gain that takes you from the 15% tax bracket into the 25% bracket, the portion of your gain that falls below the top of the 15% bracket will be taxed at 0%.
3. You expect to be in a higher tax bracket in future years. That, too, could motivate you to realize both long-term and short-term capital gains this year. You can benefit from the maximum tax rates on long-term gains or have a short-term gain taxed at, say, only 25%, rather than at 28%, 33%, 35% or 39.6%.
4. A final potential advantage to taking gains this year rather than losses. Once you've realized a gain by selling a particular position, you can turn around and reinvest in the same stock—but with a higher cost basis that will reduce your future tax liability.
Look at how the numbers can work in your favor. Suppose you're a joint filer normally in the 28% tax bracket but you expect this to be a low-income year because of an S corporation loss. If you have only $50,000 of taxable income this year and realize a $20,000 long-term capital gain, the tax on the gain will be zero, as opposed to a tax of $3,000 (15% of $20,000) on the gain if you realize it next year. Taking short-term gains now under these circumstances could save you even more.
Just be sure to take into account your investment goals, and not just tax factors, in deciding if and when to sell investments.
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