Tax-Gain Harvesting: How to Reset Your Cost Basis to $0 Tax-Free
Tax-Gain Harvesting: How to Reset Your Cost Basis to $0 Tax-Free
COACHING POINTS
- The Opportunity: The US tax code has a 0% Capital Gains Bracket (approx. $47k for Singles, $94k for Married couples in 2025). If your taxable income falls below this threshold, you can sell assets and pay $0 federal tax on the profit.
- The Strategy: Unlike “Loss Harvesting,” where you must wait 30 days to buy back (Wash Sale Rule), Gain Harvesting has no waiting period. You can sell a winning stock and buy it back 1 second later.
- The Result: This maneuver “steps up” your Cost Basis to the current market price. When you sell the asset in the future (perhaps when you are in a higher tax bracket), your taxable gain will be calculated from this new, higher price, saving you thousands.
Most investors are obsessed with harvesting losses to lower their tax bill. But in low-income years—such as retirement gap years, sabbaticals, or student years—harvesting gains is far more powerful. It effectively allows you to make a portion of your portfolio tax-free forever by leveraging the 0% bracket. Source: IRS Topic No. 409 (Capital Gains and Losses)
Scenario: You are Married. Total Income is $60,000 (well below the $94k 0% cap gains limit). You own Tesla stock bought at $10,000, now worth $40,000.
- Action: Sell Tesla for $40,000.
Realized Gain: $30,000.
Total Income: $60k + $30k = $90,000 (Still under the 0% limit).
Tax Bill Today: $0. - Immediate Re-buy: You buy back the Tesla stock immediately for $40,000.
- Future Sale: Years later, Tesla goes to $50,000. You sell.
Old Basis Gain: $50k – $10k = $40,000 gain. (Tax @ 15% = $6,000).
New Basis Gain: $50k – $40k = $10,000 gain. (Tax @ 15% = $1,500).
Net Savings: $4,500.
What-If Scenario: The “Gap Year” Strategy
Comparison: Ignoring the 0% bracket vs. Harvesting Gains.
| Strategy | Cost Basis | Future Taxable Liability |
|---|---|---|
| Do Nothing | Low ($10,000) | High (Full embedded gains taxed later) |
| Harvest Gains | High ($40,000) | Low (Only future growth is taxed) |
Visualizing the Tax Shield
| Strategy | Cost Basis ($) |
|---|---|
| Standard Holding | 10000 |
| Gain Harvesting | 40000 |
*By harvesting gains, you raise your “floor” (Cost Basis). Only the growth above this new blue bar is taxed in the future.
The 0% Tax Window (2025 Est.)
| Filing Status | Tax-Free Income Limit ($) |
|---|---|
| Single | 47000 |
| Married Jointly | 94000 |
*Capital gains usually stack on top of your ordinary income. You must stay below these thresholds (Taxable Income) to qualify for the 0% rate.
Execution Protocol
Estimate your total taxable income (W-2, interest, etc.) for the year. Subtract this from the top of the 0% Capital Gains bracket (e.g., $94,050 for MFJ). The difference is your “Harvesting Room.”
Sell the specific shares with the highest unrealized gains (up to your harvesting room). Unlike Loss Harvesting, there is no Wash Sale Rule for gains. You can buy the exact same asset back 1 minute later.
While the Federal capital gains tax may be 0%, your State might still tax capital gains as ordinary income. Always calculate the state tax cost to ensure it’s worth the federal basis step-up.
COACHING DIRECTIVE
- Do This: If you retire early (FIRE) and have a few years of low income before Social Security/RMDs kick in. Fill your 0% bracket bucket every single year.
- Avoid This: Harvesting gains if it pushes your income high enough to trigger the ACA Subsidy Cliff or makes your Social Security benefits taxable. Look at the holistic tax picture.
Frequently Asked Questions
Does the Wash Sale Rule apply?
No. The Wash Sale rule (waiting 30 days) only applies when you claim a loss. The IRS is happy for you to claim a gain and pay tax (even if that tax happens to be 0%), so you can repurchase immediately.
Does this work in an IRA?
No. This strategy is exclusively for Taxable Brokerage Accounts. IRAs and 401(k)s do not have capital gains tax; they are taxed as ordinary income upon withdrawal (or tax-free for Roth).
What is the NIIT impact?
The Net Investment Income Tax (3.8%) kicks in at higher income levels ($200k/$250k). Since Gain Harvesting targets the 0% bracket (under $94k), you are generally safe from NIIT.