In many aspects of investing, timing is everything, and that’s true for capital gains. With careful attention to your taxable income, you can strategically time the sale of profitable investments to minimize—or even avoid—taxes on capital gains.

This is called capital gains harvesting. The idea is to sell assets and take the gains when your income is low, avoiding higher capital gains rates later when your income rises.

This can be a significant savings, because at incomes below a set threshold, the capital gains tax rate is zero. Earn a dollar over that threshold and the rate jumps to 15 percent.

Any asset you hold for a year incurs taxable long-term capital gains (or tax-deductible losses) when sold. Capital gains are generally taxed at 15 percent if your income is above $78,750 for married couples filing jointly.  

The rate bumps up to 20 percent when taxable income exceeds set thresholds: $434,550 for single; $488,850 for married filing jointly; $461,700 for head of household, or $244,425 for married filing separately.

However, the rate is zero for married joint filers with taxable incomes up to $78,750 or single taxpayers and married separate filers with incomes up to $39,375.

If your income is below these levels, you can save 15 percent selling assets now to take the gain tax free. If you delay for a few years, your income may go up as you start taking Social Security and required minimum distributions from IRA or 401(k) accounts, pushing you back into the 15 percent bracket.

Remember to account for deductions when calculating your taxable income to time your capital gains sales. A married couple filing jointly can take a $24,400 standard deduction, so they can earn up to $103,150 and still qualify for the zero percent rate. (Single filers can earn up to half this amount.) A couple earning $75,000 could sell stocks worth $28,000 and stay under the threshold—and save $4,222, or 15 percent of the $28,000.

This can pay off even if you don’t really want to sell the stock. You can sell it, take the gain, and buy back the same or a similar asset right away—that’s the “harvesting” part. Repurchasing has the added advantage of resetting the cost basis of the asset to current market rates. When you sell the new asset later, you will pay gains only on the difference between that new, usually higher basis and the sale price. 

Of course, the technique can also work when you are at the high end of the income threshold. If you expect some additional income that will bump you into the 20 percent bracket in the next year or two, take some gains now. It’s also a useful move if you expect the capital gains rates to increase in the future. 

Capital gains harvesting is the flip side of capital loss harvesting—selling off declining assets to claim the loss and offset some of your capital gains. When markets are booming, you may not have many losing assets to sell and harvest, so optimizing the timing of your gains may be a useful tool.

Note that you can harvest gains and replace the assets sold without violating the wash sale rule. This rule prohibits selling assets at a loss to offset gains and buying them back within 30 days. The wash sale rule applies only to losses, not to gains.

If you need help assessing whether capital gains harvesting can benefit you or with other tax planning issues, please contact us.

-Toni Shears


AARP: Don’t Miss Out on Tax-Free Money From Stocks, Nov. 8, 2019.

Topic 409: Capital Gains and Losses:
Publication 550;