Capital Gains Harvesting: The Strategy for Paying 0% Tax on Investment Profits
Capital Gains Harvesting: The Strategy for Paying 0% Tax on Investment Profits
CORE INSIGHTS
- The 0% Bracket: Married couples with income under ~$94k can pay 0% federal tax on Long-Term Capital Gains. IRS Topic No. 409
- Basis Reset: By selling winners in this bracket and rebuying immediately, you reset your cost basis higher for free.
- No Wash-Sale Rule: Unlike losses, gains have no 30-day wait. You can sell and rebuy instantly. IRC § 1091 (Inverse)
Most investors obsess over harvesting losses. But the true masters know when to harvest gains. If you are in a low-income year (retirement, sabbatical), you can realize profits tax-free, washing away future tax liability.
What-If Scenario: The Free Reset
Couple has $60k income. The 0% bracket limit is $94k.
• The Gap: They have $34k of “Tax Room” ($94k – $60k).
• The Action: Sell stock with $30k profit. Immediate Rebuy.
• The Cost: $0 Tax (since total income $90k < $94k).
• The Benefit: Cost basis rises by $30k. Future tax savings: ~$4,500. IRC § 1(h)
Visualizing the Tax Bracket Opportunity
*Figure 1: “Tax Room”. The Green area is your capacity to realize gains at 0%. Use it or lose it.*
| Feature | Tax-Loss Harvesting | Gain Harvesting |
|---|---|---|
| Goal | Deduct Taxes | Reset Basis (Free) |
| Market | Asset Down | Asset Up |
| Wash Rule | Wait 30 Days | Instant Rebuy |
| Timing | High Income Years | Low Income Years |
Strategic Action Steps
The Bottom Line: Who Should Choose What?
- Harvest Gains: If you are in the 10% or 12% tax bracket (Retirees, Students).
- Harvest Losses: If you are in high brackets (22%+). Paying 0% is better than deducting at 15%.
Does the Wash-Sale Rule apply to gains?
No. The Wash-Sale Rule only applies to losses. You can sell a winner and buy it back immediately to reset your basis higher.
Who should use Capital Gains Harvesting?
Investors in low-income years (e.g., retirement, sabbatical) whose income falls below the 0% capital gains threshold (~$94k for couples).
Does this increase my state taxes?
Possibly. While federal tax may be 0%, many states tax capital gains as ordinary income. Always check your specific state laws.