Tax gain/loss harvesting

  Tax gain/loss harvesting is the act of selling your investments (either at a loss or a gain as the names imply) to minimize your tax burden either at present or in the future.

Tax loss harvesting

Tax loss harvesting is the act of selling a capital asset at a loss. This loss is able to offset ordinary income to the tune of $3,000 a year, with any excess capital losses able to be carried over to future tax years. Additionally, capital losses can offset capital gains. The distinction is long term capital losses offset long term capital gains, and short term for short term.

Wash sale

A wash sale is when a sale of a capital asset is performed and a “substantially identical” to the one sold is purchased within 30 days of the sale. This is inclusive of things like dividends being reinvested, purchasing a different share class (i.e. a sale of Z and a purchase of ZG), or funds that track the same index (VTSAX for FZROX). A wash sale results in no longer being able to use the sale as a capital loss! Any tax benefit associated with said sale is rendered useless, and effectively results in a higher tax burden later as a result of the cost basis being lower than the original purchase.

Tax gain harvesting

Tax gain harvesting is a much less talked about action, performed generally in low income years. The act of tax gain harvesting is similar to that of tax loss harvesting, but realizing gains instead of losses. Long term capital gains are favorably taxed, and to a certain threshold (i.e. $80,800 of income for married filing jointly), they are taxed at 0%. This means you can essentially realize capital gains for free, and be able to reset the cost basis of the investments to the new, higher value.

Wash sales do not apply, as tax gain harvesting is not a tax write-off.

An example:
$1,000 of VTSAX purchased at $100/share, valued now at $150/share. If tax gain harvested at 0%, the new cost basis is $150/share ($1,500 value) instead of $100/share. At the next point of sale, let’s say it’s $200/share, taxed at 15%. In the tax gain harvested example, the capital gains are $50/share, or $500 of gains at 15% or $75 in taxes. Without having harvested, the cost basis would’ve been $100/share and a capital gain of $100/share, or $1,000 of gains at 15%, or $150 in taxes.

This is, of course, reliant upon being able to realize gains at a lower rate than they are subsequently sold for. For most people’s working careers, tax gain harvesting does not make financial sense.