Tax gain harvesting?


Full time employment: Posting here.
Oct 21, 2007
New York
It seems likely that the capital gains rate will go up in the next year or two. Obama has talked about raising it to 20 or 25%. And while McCain doesn't want to raise it, it goes back to 20% after 2010 under current law. It entirely possible he won't have the votes in the Senate to change that, even if he wants to.

So, given that the days of 15% capital gains are probably numbered, has anyone given any thought to whether its worth executing wash sales on positions that are in the black to 'capture' (if you will) the 15% tax rate on your existing gains, and reset your cost bases?

I've not done the math to see if under what scenarios this is worthwhile, has anyone else?
I've run the numbers for sale of real estate and business stock, and if the capital gains rate goes to 20%, it wont hurt to stay as is. The business stock generates enough income to offset the extra 5% capital gain after tax. The real estate is in a slump but I believe it will increase 15-20% over the next 5 years and cover the additional capital gain when we sell it. But if capital gains go to 25% it would make some sense to sell before 2010.
I'm selling like crazy this year and I plan to continue through 2009 and 2010 as long as the zero % bracket lasts. I don't really care too much if I exceed that bracket and get into the 15% CG bracket, because it is still a relative deal compared to what I might be paying in 3 years.

My goal is to sell off a number of tax inefficient actively managed funds and replace them with tax efficient index funds or tax managed active funds. I'm tired of seeing 5-10% of my fund value being distributed as capital gains every year (and paying tax on it).
People with a lot of time might not want to take gains now

Depending upon your time horizon, it may not make sense to sell. For example:

Let's say I have a 10K investment worth 20K today. Taxes are 15% so I sell.
I pay 15% on the 10K gain or 1.5K netting 20K - 1.5K = 18.5K
I reinvest this in the market.

Now, let's assume my investment goes up 6x in value (time frame doesn't really matter, just gains) and I decide to sell.
Assume new tax rate is 40% on capital gains (ouch!)

My 18.5K is now worth 6 times = 111K of which 92.5K is taxble (the 111 - 18.5 originally invested).
40% of 92.5K = 37K tax due netting: 111K - 37K = 74K

If I did not originally sell, my 20K is now worth 120K of which 110K is taxable. 40% tax is 44K netting me 120K - 44K = 76K so I am better off if I didn't sell!

The point is actually, regardless of the future tax rate (as long as it's < 100%), if you can wait long enough, you can always make up the taxes through the gain on the taxes paid now.

My solution was to take some gains now but defer others. After all, I am hoping that I never have to sell some of my stock (that means I ran of of money, doesn't it?) so I might as well let it grow for now.

I did some calculations after posting this and determined that, depending on the growth rate one assumes, it only makes sense to sell now if you don't intend to hold the position very long (e.g. single-digit years). In my case I'm not selling anything.
I plan on selling equities in my taxable account first, so the single digit holding period may well be the case for me. I'll have to evaluate the situation before the lower rates go away. I'm already nearly at zero total gains, having recently sold stocks and moved to funds. But that is composed of some big losses and big gains.

This year long term gains are free if you are in a 15% bracket so I will sell my gains and keep my loses for when they tax gains again. I will wait for year end to sell anything.

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