Tax gain harvesting
You may have heard about tax loss harvesting, a tactic that uses up to $1,500 per individual or $3,000 per couple in investment losses to reduce your income tax. For example, you sell 2 stocks or funds this tax year. One has a $15,000 loss and the other a $10,000 gain. Both have been held longer than one year, so they are combined and subject to the long-term capital gains tax rules. In this case, the net is a $5,000 loss. However, since the loss limit is $1,500, you will only report the $1,500 loss this year and carry forward the remaining $3,500 to offset gains in future years. While a useful tax reduction technique, it requires that a loss exceed a gain and is limited to the small amount of $1,500 (or $3,000) per year. [Note: it’s a little more complicated because short-term gains are taxed differently than long-term gains. First, short-term losses offset short-term gains, then long-term losses offset long-term gains, then the excess loss in one category can offset the other. Carryforward losses must be either short-term or long-term and used as such in the future. See the instructions for Federal tax form Schedule D. For now, we’ll just consider all sales as long-term.]
There is a little-known flip side to this strategy, tax gain harvesting, that may yield much greater tax savings. As stated, long-term capital gains are taxed under the capital gains tax rules, which include income limits. Currently, capital gains are taxed at 0%, 15%, or 20%, and thus can be taxed at a lower rate than earned income. For tax gain harvesting to work, your taxable income must be below $49,450 (single) or $98,900 (couple) so none of the gain is taxed; any amount above that limit is taxed at 15% (until the 15% limit of $545,500 single, $613,700 couple). And remember, taxable income is after subtracting the standard or itemized deduction, so in 2026 that’s another $32,200 above the 0% tax limit.
Consider this example. You and your spouse together have W-2 wages of $85,000 (maybe it was $100,000, but you contributed $15,000 to 401(k)s). You sell an investment held for more than 1 year, realizing a $46,000 gain. Your first reaction is that adding $46,000 to $85,000 will mean you’ll be on the hook for a lot of tax. But no. You will owe no tax on that gain because adding it to your wage income keeps your taxable income under the $98,900 threshold for 0% tax on the gain. So you harvested a gain and paid no tax on it. But it gets better.
When selling stocks or funds at a loss, watch out for the “wash-sale” rule and avoid repurchasing the same stock within 60 days. Otherwise, the loss is disallowed. However, with gains, there is no “wash-sale” rule. This means you can sell the investment for the $46,000 gain and rebuy it the same day for the same price, and the transaction will be tax-free. Why is this good? You have now reset the “basis,” or initial cost, of the investment $46,000 higher. You can do this again in later years if your income and tax posture allow it, each time resetting the “basis” higher. This essentially reduces the tax on any future gain in this investment when you sell again. For example, years later you need $20,000 in retirement and sell enough shares to receive $20,000. When you calculate the “sales price - original basis,” maybe only $2,000 is the gain because the basis was reset higher. In retirement, your tax bill might not go up at all or only a little with the $2,000 capital gain, even though you put $20,000 in your pocket. All from using up the space in the tax code for long-term capital gains to be taxed at 0% and capturing it as a higher basis.
Now, of course, higher-income individuals and couples are likely above the 0% capital gains bracket, so this strategy is unavailable to them. Retirees might be better positioned to take advantage, as their income could be lower. Unfortunately, because any distribution from a traditional or rollover IRA or 401(k) is considered income, those distributions reduce the benefit of this strategy. But for those without significant wage or pension income, or other sources of non-earned income, this strategy can lower your tax bill over the years on stock, bond, or fund holdings in an after-tax brokerage account.
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