How to Leverage Capital Gains Harvesting for Your Finances

Chris Maurer |

A portfolio that balances risk with reward can help ensure your investments ultimately meet your financial goals for the future. Managing a well-balanced portfolio requires careful planning, and this could include selling winning securities to help reduce future tax bills. This is called capital gains harvesting. If you hold taxable accounts, realizing your gains could positively impact your bottom line in certain tax years. Learn more about capital gains harvesting and how it could prove to be a meaningful investment strategy.

What Is Capital Gains Harvesting?

Capital gains harvesting, or tax-gain harvesting, is a move investors can make to yield profits with little or no impact on their taxes. The key to this particular financial move is an understanding of how to use the current tax rates and brackets to your advantage. Capital gains are considered either short term or long term and may include:

  • Stocks
  • Bonds
  • Real estate
  • And more…

Short-term gains are profits realized on the sales of assets owned for less than a year, while long-term gains are profits made by selling assets owned for longer periods of time. Long-term capital gains are taxed at a lower rate than ordinary income, making them the most ideal for this financial strategy.  

When it comes to tax-gain harvesting, timing is everything. The reasons for implementing this strategy vary depending on your financial status, and it may not always work in your favor. The idea is to realize just enough profit to stay within a lower tax bracket. The first step is to estimate your taxable income for the year. For example, most people end up paying a capital gains tax of 15%. However, if you made less than $40,400 in 2021 ($80,800 if married and filing jointly), you'll end up paying 0% in taxes on long-term gains. 

When's the Best Time to Harvest Your Capital Gains?

The goal of this strategy is to help reduce future taxes and create a more balanced portfolio. 

Selling a winning investment now and paying the tax (or zero tax) could prevent you from paying more in taxes later. Choosing to harvest capital gains depends on your personal financial situation. Tax-loss harvesting is typically easy to do year-round. However, many investors wait until the end of the year to implement tax-gain harvesting. At this time, you can take better stock of your total income and losses to calculate if this financial move is ideal. This strategy could benefit your portfolio if:

You need to offset some losses

As your portfolio fluctuates throughout the year, you may have incurred some capital losses. Taking advantage of your capital gains can help realign your portfolio in this scenario. If your losses end up zeroing out your gains, this may eliminate any taxes that could be due. 

You qualify for a lower tax bracket

The federal government seldom offers 0% tax rates. Taking advantage of your current status can help save money in the long run. Investors with income that fluctuates from year to year could, at certain points, benefit from this strategy based on their current tax bracket. This can also prove to be a sound decision for investors who are already in the 15% tax bracket and will likely be in the 20% bracket the following year. 

Factoring in the Wash-Sale Rule

How does the wash-sale rule apply? Implemented by the IRS, the wash-sale rule is designed to prevent investors from claiming artificial capital losses for tax purposes and then quickly buying the security back. Under this rule, investors must wait a minimum of 30 days before repurchasing. However, this rule doesn't apply to capital gains.

Investors can get around this rule by selling each share for gain. At this point, they can repurchase the same investment back immediately if desired. Through capital gains harvesting, you're not eliminating winning investments. You're simply harvesting the gain at a time and tax rate that's most favorable to your financial position. 

Harvest Capital Gains with a Professional 

Your portfolio is made up of many moving parts. Before considering this or any other financial strategy, a consultation with your financial adviser should be your first step. At Park Place Financial, we can help you develop a personalized investment strategy that fosters a well-balanced portfolio and maximized returns. 

Sign up for our complimentary financial review, or reach out to learn more about profit harvesting first-hand from one of our financial professionals.