What is Tax-Gain Harvesting?

In the world of investing, we often hear about "tax-loss harvesting," but there's another powerful strategy that many investors overlook: tax-gain harvesting.

What is Tax-Gain Harvesting?

Tax-gain harvesting is the strategic sale of appreciated investments to realize capital gains when your tax rate on those gains is low or zero. This might seem counterintuitive—why would you want to trigger a taxable event? The answer lies in understanding how capital gains are taxed.

How Capital Gains Tax Works

Long-term capital gains (on assets held more than one year) are taxed at preferential rates:

• 0% rate: For married filing jointly with taxable income up to $94,050 (2024) / $96,700 (2025)
• 15% rate: For income between $94,050 and $583,750 (2024)
• 20% rate: For income above $583,750 (2024)

The key insight: if you're in the 0% bracket, you can realize capital gains and pay absolutely no tax on them.

Who Should Consider Tax-Gain Harvesting?

1. Early Retirees

If you retire before Social Security and RMDs kick in, you may have several years of low taxable income. This is the perfect time to harvest gains at 0%.

Example: A married couple with $60,000 in qualified dividends and no other income has a standard deduction of $29,200 (2024), leaving $30,800 of taxable income. They could realize an additional $63,250 in long-term capital gains and still pay 0% tax (because $30,800 + $63,250 = $94,050, right at the 0% threshold).

2. Military Members in Combat Zones

Combat Zone Tax Exclusion (CZTE) can dramatically lower your taxable income. If your only taxable income is investment income, you might be able to harvest significant gains tax-free.

Example: An E-7 deployed to a combat zone for the full year might have $0 in taxable earned income (due to CZTE). With the standard deduction, they could potentially realize over $90,000 in capital gains at 0% tax.

3. Transition Years

Any year when your income temporarily drops—sabbatical, between jobs, starting a business—can be an opportunity for tax-gain harvesting.

How Tax-Gain Harvesting Works

Step 1: Calculate Your Capital Gains Budget

Determine how much capital gains you can realize before hitting the 15% bracket:

• Start with the 0% threshold: $94,050 (married) or $47,025 (single) for 2024
• Subtract your other taxable income (wages, business income, etc.)
• The remainder is your 0% capital gains "budget"

Step 2: Identify Appreciated Positions

Look for investments in taxable accounts with long-term gains. Focus on:

• Positions you want to continue holding (you'll buy them back)
• Highly appreciated positions that reset your cost basis
• Positions where you want to rebalance anyway

Step 3: Sell and Immediately Repurchase

Unlike tax-loss harvesting, there's no wash-sale rule for gains. You can sell an investment and immediately buy it back. This resets your cost basis to the current market value.

Example: You bought VTI (Vanguard Total Stock Market ETF) for $50,000. It's now worth $80,000. You sell it, realizing a $30,000 gain (taxed at 0%), and immediately buy it back for $80,000. Your new cost basis is $80,000, not $50,000.

Step 4: Reset Your Cost Basis

By "harvesting" the gain now at 0%, you've reset your cost basis higher. In the future, when you sell at a potentially higher tax rate, your taxable gain will be smaller.

Real-World Example: Military Couple

Captain John Smith is deployed to Afghanistan for all of 2024. His $120,000 salary is entirely CZTE-excluded. His wife Sarah works part-time, earning $25,000.

2024 Tax Calculation:

• Taxable earned income: $25,000 (Sarah only; John's is excluded)
• Standard deduction: -$29,200
• Taxable income before capital gains: $0 (can't go negative)
• 0% capital gains bracket available: $94,050

The Smiths could harvest up to $94,050 in long-term capital gains and pay $0 in federal tax.

The Strategy:

• They sell $94,000 of appreciated stock (cost basis $60,000, current value $94,000)
• They realize $34,000 in long-term capital gains
• Tax owed: $0
• They immediately repurchase the same stock for $94,000
• New cost basis: $94,000 (previously $60,000)

Future Benefit: When they eventually sell in retirement at a 15% capital gains rate, they'll owe tax on far less gain because they reset the basis from $60,000 to $94,000.

Key Considerations

State Taxes

Even if federal tax is 0%, your state might tax capital gains. Check your state's rules before harvesting.

Net Investment Income Tax (NIIT)

The 3.8% NIIT doesn't apply until modified AGI exceeds $250,000 (married) or $200,000 (single), so most people doing tax-gain harvesting won't hit this.

Medicare Premiums (IRMAA)

If you're on Medicare, be aware that capital gains can increase your MAGI and trigger higher Part B and Part D premiums two years later.

Timing

You need to hold assets for more than one year to get long-term capital gains treatment. Short-term gains are taxed as ordinary income.

Tax-Gain Harvesting vs. Tax-Loss Harvesting

Strategy	Tax-Loss Harvesting	Tax-Gain Harvesting
When to Use	High-income years	Low-income years
Goal	Defer taxes	Pay taxes at 0%
Wash Sale Rule	Yes (must wait 30 days)	No (can buy back immediately)
Cost Basis Effect	Lowered	Raised

Action Steps

1. Calculate your 2024 taxable income (before capital gains)
2. Determine if you're in the 0% bracket (or close to it)
3. Review your taxable investment accounts for appreciated positions
4. Calculate your gain-harvesting budget
5. Execute the strategy before year-end if beneficial

The Bottom Line

Tax-gain harvesting is a powerful but underutilized strategy. If you're in a low-income year—due to retirement, military deployment, career transition, or business startup—you have a unique opportunity to "pay" 0% tax on investment gains. This resets your cost basis and can save substantial taxes in the future.

As with all tax strategies, the details matter. Work with a knowledgeable tax professional to ensure you're calculating correctly and not triggering unintended consequences.