InvestingRetirementTax Tips
Tax-Gain Harvesting vs Deferral: Why Paying 15% Now Can Save You $88,000 Later
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Result: Harvesting saved $88,000 in federal taxes.
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Tax-Gain Harvesting vs Deferral: Why Paying 15% Now Can Save You $88,000 Later
CORE INSIGHTS
- Rate Arbitrage: Paying 15% Capital Gains tax today is better than paying 23.8% (20% + 3.8% NIIT) later. This 8.8% spread is your “Tax Alpha.”
- Gap Years: Early retirement or sabbaticals create low-income windows. Use these years to “fill up” the 0% or 15% capital gains bracket.
- Cost Basis Reset: Harvesting gains increases your cost basis. This reduces future tax liability, acting as a permanent tax shield.
“Never Sell” is not always right. If you expect your future tax bracket to be higher (due to RMDs or career growth), Tax-Gain Harvesting allows you to lock in today’s low rates on purpose.
The Arbitrage Formula
Tax Alpha = (Future Rate – Current Rate) * Gain
- Current Rate: 15% (Low Income Year)
- Future Rate: 23.8% (Peak Earning / RMD)
- Spread: 8.8% Saved
What-If Scenario: The $1 Million Gain
| Strategy | Tax Rate | Tax Bill |
|---|---|---|
| Harvest Now (Gap Year) | 15% | $150,000 |
| Defer Later (High Inc) | 23.8% | $238,000 |
Visualizing Tax Alpha
*Figure 1: Net Proceeds. Harvesting (Green) retains significantly more wealth than Deferring (Red).*
Strategic Action Steps
1
Identify Gap Years
Mark years with low ordinary income (retirement, school, sabbatical). These are your harvesting windows.
Mark years with low ordinary income (retirement, school, sabbatical). These are your harvesting windows.
2
Fill the Bracket
Calculate how much room is left in the 15% bracket. Sell enough winners to fill this bucket exactly.
Calculate how much room is left in the 15% bracket. Sell enough winners to fill this bucket exactly.
3
Rebuy Immediately
Unlike losses, gains have no Wash-Sale rule. You can sell to harvest the gain and buy back the same stock instantly to reset basis.
Unlike losses, gains have no Wash-Sale rule. You can sell to harvest the gain and buy back the same stock instantly to reset basis.
The Bottom Line: Who Should Choose What?
- Harvest: Investors expecting higher future tax rates (RMDs, career growth).
- Defer: Investors expecting lower future rates (retirement drop) or planning to leave assets to heirs (Step-Up).
Frequently Asked Questions
What is tax-gain harvesting?
Deliberately selling assets at a gain in low-income years to pay 0% or 15% tax now, resetting the cost basis higher to avoid 20%+ taxes later.
When does paying tax now make sense?
When your current rate (e.g., 0% or 15%) is significantly lower than your expected future rate (e.g., 23.8% due to RMDs or career growth).
Is this only for low earners?
No. High earners can use ‘Gap Years’ (sabbaticals, early retirement) to harvest gains at low rates before RMDs kick in.
Disclaimer: This content is for informational purposes only. Tax brackets change annually. Consult a CPA.
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