Selling to lower or eliminate capital gains

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coachd50
Posts: 1778
Joined: Sun Oct 22, 2017 10:12 am

Selling to lower or eliminate capital gains

Post by coachd50 »

While reading another thread describing selling to fill up the 0% cap gains bucket, a thought popped into my head. It is probably extremely elementary to many here, but never occurred to me before.

If you are in a position where your income is below the threshold for 0% capital gains, would selling, and then buying back immediately allow you to reset your position at a higher basis while avoiding the capital gains tax? Or am I missing something staring right at me?
livesoft
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Re: Selling to lower or eliminate capital gains

Post by livesoft »

BH Wiki article: https://www.bogleheads.org/wiki/Tax_gain_harvesting

Some folks would rather do Roth conversions though instead of tax-gain harvesting.
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DSInvestor
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Re: Selling to lower or eliminate capital gains

Post by DSInvestor »

The Long Term Capital Gain (LTCG) is included in your Federal Adjusted Gross Income (AGI) even though the Federal tax return may tax some or all of it at 0% tax rate. The Federal AGI is likely to pass to your state tax return and your state is likely to tax it at state marginal rates.

The higher AGI with the LTCG may have undesirable consequences like disqualifying you for certain tax credits or causing more social security income to be taxable. Run your numbers carefully with tax software.

If you have any capital loss carryovers, the loss carryovers will offset the capital gain even if you were eligible for the 0% fed tax rate on LTCG.
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MikeG62
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Re: Selling to lower or eliminate capital gains

Post by MikeG62 »

coachd50 wrote: Sun Jul 25, 2021 4:10 pm While reading another thread describing selling to fill up the 0% cap gains bucket, a thought popped into my head. It is probably extremely elementary to many here, but never occurred to me before.

If you are in a position where your income is below the threshold for 0% capital gains, would selling, and then buying back immediately allow you to reset your position at a higher basis while avoiding the capital gains tax? Or am I missing something staring right at me?
To answer your specific question, yes you are correct in your understanding - it resets the cost basis to current cost while avoiding Federal Income tax (although there may be state tax implications and other possible Federal tax implications if you are retired, such as impacting any health care subsidy you are enjoying, among others). It should be looked at carefully based upon your individual facts and circumstances. Having said all that, it resets your cost basis.
Last edited by MikeG62 on Mon Jul 26, 2021 8:38 am, edited 1 time in total.
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cchrissyy
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Re: Selling to lower or eliminate capital gains

Post by cchrissyy »

yes, people do this. it is called tax gain harvesting and it can be good if you think you have a temporarily lower income such as while unemployed or enrolled in school.

just watch out for state taxes. at the time i did this, I paid 0% federal but some higher figure for CA state. it was still worth it, just something to consider.
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