Tax gain harvesting.

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ArrieS
Posts: 1072
Joined: Sun Aug 05, 2012 10:56 am

Tax gain harvesting.

Post by ArrieS »

I thought I would do a little write up about tax gain harvesting for those that don't know anything about it.

For those of you who are unaware, for taxable accounts if your taxable income is below certain thresholds it makes sense to sell stocks you have long-term gains (LTG) in and immediately buy them back to reset the cost basis to a higher rate.

The currently threshold for single filers is $39,375 and $78,750 for a married couple.

So for example you're single and you made $40,000 in total income. This include $38,000 in wages and $2,000 in LTG (this include stock sold and qualified dividends).

To keep things simple you total deductions are $12,000. So you're taxable income is $28,000. That $2,000 in LTG is now tax free. So really your taxable income drops to $26,000.

So now for the why should I give a flying fudge. Because if you look at the difference between $28,000 and $39,375 it is $11,375 of additional LTG income you could have tax free. This can be from dividends, or LTG you realize on stock.

Now the LTG on stock is a long-term play if you keep buying it back.

For example you buy stock A at the beginning of the year for $10,000. It goes up 10% by December so it's $11,000. You sell it all in one day realizing the 10% or $1,000 dollar gain. You immediately buy it back for $11,000. The Government says, you gained $1,000 dollars but you don't owe any taxes. Your new cost basis is $11,000.

Next year it goes up another 10% so you have $12,100. 10% or $1,100 in gains, no taxes owed and you walked the cost basis up again.

Rinse and repeat until you start getting close to the $11,375 limit. In otherwords your investment has grown to $110,000 and if you sold it all at once you wouldn't owe any taxes on it as opposed to if you held it the whole time. You're looking at a gain of $10,000'ish instead of $100,000.

It's one way to almost turn a taxable account into a ROTH one. Keep walking the cost basis up if you can so when you finally sell it for good you pay a lot less, if not nothing.
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. - Pudd'nhead Wilson's Calendar

McWinning
Posts: 64
Joined: Tue Jun 04, 2019 5:55 pm

Re: Tax gain harvesting.

Post by McWinning »

Good write-up; thanks for sharing.

wcerezo
Posts: 6
Joined: Mon Jan 14, 2019 8:12 am

Re: Tax gain harvesting.

Post by wcerezo »

ArrieS wrote:I thought I would do a little write up about tax gain harvesting for those that don't know anything about it.

For those of you who are unaware, for taxable accounts if your taxable income is below certain thresholds it makes sense to sell stocks you have long-term gains (LTG) in and immediately buy them back to reset the cost basis to a higher rate.

The currently threshold for single filers is $39,375 and $78,750 for a married couple.

So for example you're single and you made $40,000 in total income. This include $38,000 in wages and $2,000 in LTG (this include stock sold and qualified dividends).

To keep things simple you total deductions are $12,000. So you're taxable income is $28,000. That $2,000 in LTG is now tax free. So really your taxable income drops to $26,000.

So now for the why should I give a flying fudge. Because if you look at the difference between $28,000 and $39,375 it is $11,375 of additional LTG income you could have tax free. This can be from dividends, or LTG you realize on stock.

Now the LTG on stock is a long-term play if you keep buying it back.

For example you buy stock A at the beginning of the year for $10,000. It goes up 10% by December so it's $11,000. You sell it all in one day realizing the 10% or $1,000 dollar gain. You immediately buy it back for $11,000. The Government says, you gained $1,000 dollars but you don't owe any taxes. Your new cost basis is $11,000.

Next year it goes up another 10% so you have $12,100. 10% or $1,100 in gains, no taxes owed and you walked the cost basis up again.

Rinse and repeat until you start getting close to the $11,375 limit. In otherwords your investment has grown to $110,000 and if you sold it all at once you wouldn't owe any taxes on it as opposed to if you held it the whole time. You're looking at a gain of $10,000'ish instead of $100,000.

It's one way to almost turn a taxable account into a ROTH one. Keep walking the cost basis up if you can so when you finally sell it for good you pay a lot less, if not nothing.
Correct me if I am wrong but I am assuming you meant deferring capital gains tax payments. If so, why not just NOT sell annually? Wouldn't you not owe any capital gains taxes that way too?

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ArrieS
Posts: 1072
Joined: Sun Aug 05, 2012 10:56 am

Re: Tax gain harvesting.

Post by ArrieS »

wcerezo wrote:
Correct me if I am wrong but I am assuming you meant deferring capital gains tax payments. If so, why not just NOT sell annually? Wouldn't you not owe any capital gains taxes that way too?
I'm not sure what you mean.

If your taxable income is below the threshold you will not be taxed. The tax rate is 0%. You aren't deferring to pay it later, the Government is taxing you in that year, it's just at 0%.
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. - Pudd'nhead Wilson's Calendar

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cswift01
Posts: 819
Joined: Thu Dec 08, 2016 10:46 am

Re: Tax gain harvesting.

Post by cswift01 »

ArrieS wrote:I thought I would do a little write up about tax gain harvesting for those that don't know anything about it.

For those of you who are unaware, for taxable accounts if your taxable income is below certain thresholds it makes sense to sell stocks you have long-term gains (LTG) in and immediately buy them back to reset the cost basis to a higher rate.

The currently threshold for single filers is $39,375 and $78,750 for a married couple.

So for example you're single and you made $40,000 in total income. This include $38,000 in wages and $2,000 in LTG (this include stock sold and qualified dividends).

To keep things simple you total deductions are $12,000. So you're taxable income is $28,000. That $2,000 in LTG is now tax free. So really your taxable income drops to $26,000.

So now for the why should I give a flying fudge. Because if you look at the difference between $28,000 and $39,375 it is $11,375 of additional LTG income you could have tax free. This can be from dividends, or LTG you realize on stock.

Now the LTG on stock is a long-term play if you keep buying it back.

For example you buy stock A at the beginning of the year for $10,000. It goes up 10% by December so it's $11,000. You sell it all in one day realizing the 10% or $1,000 dollar gain. You immediately buy it back for $11,000. The Government says, you gained $1,000 dollars but you don't owe any taxes. Your new cost basis is $11,000.

Next year it goes up another 10% so you have $12,100. 10% or $1,100 in gains, no taxes owed and you walked the cost basis up again.

Rinse and repeat until you start getting close to the $11,375 limit. In otherwords your investment has grown to $110,000 and if you sold it all at once you wouldn't owe any taxes on it as opposed to if you held it the whole time. You're looking at a gain of $10,000'ish instead of $100,000.

It's one way to almost turn a taxable account into a ROTH one. Keep walking the cost basis up if you can so when you finally sell it for good you pay a lot less, if not nothing.
Very nice, thanks.

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mhende2
Posts: 60
Joined: Wed Oct 12, 2016 12:32 pm

Re: Tax gain harvesting.

Post by mhende2 »

That is a great explanation and I hadn't heard of that method before.

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repinda808
Posts: 209
Joined: Fri Sep 13, 2013 3:18 pm

Re: Tax gain harvesting.

Post by repinda808 »

Interesting. Sort of like investing the proceeds from the sale of a home into the next home...
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