Harvesting Long Term Gains - Do you do it?

[aneel]

As it nears the end of the year I'm looking at my taxable account and determining what actions (if any) actions I should take to harvest long term capital gains since my LT gains are taxfree due to my tax bracket.  I'm also feeling like at the moment this is probably over kill and not worth my time.  At the moment I have less than $500 in taxable long term gains and I sit squarely in bottom 2 tax brackets with no anticipation of moving any time soon, so I may just wait until next year.

For those of you who are able, do you harvest capital gains?  What are the pros and cons you see?

[terran]

If you're in a bracket that has 0% capital gains taxes I think it makes a lot of sense to harvest gains. Other things to consider: Do you expect your state taxes to be the same in the future? If you expect to be in a lower or no tax state in the future it might make sense to wait. Are their other tax considerations such as tax credits with income cutoffs? The savers tax credit and the earned income tax credit come to mind. If you're on ACA health insurance, how will harvesting gains effect your subsidies?

[Indexer]

For starters, what Terran said, those are all good things to consider.

Let me summarize the situation. Currently in 0% LTCG bracket, next bracket is 15%. If you realize $500 now as opposed to at a future date when you could be in the 15% bracket you will save approximately $75.

[Dr. Pepper]

What do you mean by harvesting long term gains? Like you bought a mutual fund and it went up 500$ and you want to cash out? Do you have a more productive use for the capital? From a pure tax perspective keeping the money invested for as long as possible is the most tax efficient way to compound it. There is a good paper written by Tweedy Browne on tax efficiency and the impact on returns over time. http://tweedy.com/resources/library_docs/papers/HighTaxReturns.pdf

[terran]

What do you mean by harvesting long term gains? Like you bought a mutual fund and it went up 500$ and you want to cash out? Do you have a more productive use for the capital? From a pure tax perspective keeping the money invested for as long as possible is the most tax efficient way to compound it. There is a good paper written by Tweedy Browne on tax efficiency and the impact on returns over time. http://tweedy.com/resources/library_docs/papers/HighTaxReturns.pdf

The point being you reinvest it immediately. If you have low enough income you pay 0% long term capital gains taxes, so you're able to lock in a higher cost basis at the cost of whatever you state tax capital gains rate is. Tax free forever beats deferring taxes.

[Dr. Pepper]

Ok I see what your saying, I guess in theory it makes sense, but the effect is small enough that I'm not sure it's going to do much for you. I would also look at what the trading cost associated with the transaction are, because that's going to reduce the benefit further.

[Shane]

GCC talks a little bit about LTCG harvesting in this post: Never Pay Taxes Again, and I'm pretty sure there are other posts on Jeremy's site that go more into the mechanics of how he does the harvesting, reinvesting immediately in something similar but different enough that it doesn't trigger a wash sale, etc...

[terran]

GCC talks a little bit about LTCG harvesting in this post: Never Pay Taxes Again, and I'm pretty sure there are other posts on Jeremy's site that go more into the mechanics of how he does the harvesting, reinvesting immediately in something similar but different enough that it doesn't trigger a wash sale, etc...

Wash sales apply to capital loss harvesting, not capital gain harvesting. If you sell at a gain you can rebuy the exact same thing as long as such a transaction is allowed by your brokerage (some have frequent trading limitations).

[oldladystache]

I've been doing it for many years. every year in November or December I figure out how much space I have (if any) in my 0% bracket and fill it up. I still have to pay state income tax but I think it's worth it.

[Shane]

GCC talks a little bit about LTCG harvesting in this post: Never Pay Taxes Again, and I'm pretty sure there are other posts on Jeremy's site that go more into the mechanics of how he does the harvesting, reinvesting immediately in something similar but different enough that it doesn't trigger a wash sale, etc...

Wash sales apply to capital loss harvesting, not capital gain harvesting. If you sell at a gain you can rebuy the exact same thing as long as such a transaction is allowed by your brokerage (some have frequent trading limitations).

Thanks terran. I didn't realize wash sales only applied when you harvest losses. Good to know.