Tax gain harvesting in a low bracket year

How it works

Long term gains are stacked on top of ordinary income, and the part that falls below this year's official ltcg zero rate top single (not yet verified here; see the official source below) of taxable income for a single filer, or the doubled line for a joint return, is taxed at 0 percent. A person in that position who sells shares held more than a year owes no federal tax on that slice of gain. There is no wash sale rule for gains, so the same shares can be bought back the same day, and the new purchase price becomes the new basis. Gains above the line are taxed at 15 percent. The gain still counts as income for other purposes, so it can raise the tax on Social Security benefits, reduce a premium tax credit, or push income over the Medicare surcharge line two years later. State tax may still apply.

What it gives

Gain that would be taxed later at 15 percent or more is taxed at 0 percent now.

The shares can be repurchased immediately, so the investment does not change.

The higher basis means a smaller gain, or a larger loss to harvest, in a future year.

What it costs, or where the catch is

The gain is still income, and it can cost a premium tax credit or raise Medicare premiums.

Only the slice of gain under the line gets the 0 percent rate; the rest is taxed.

Many states tax the gain at their ordinary rate regardless.

A worked example

Edie retired early and lives on savings, with taxable income of $20,000 this year. If the top of the 0 percent band for a single filer were $47,000, she has $27,000 of room. She sells fund shares bought for $40,000 that are now worth $65,000, a $25,000 gain, and buys them back the same afternoon. The gain fits under the line, so her federal tax on it is $0, and her basis is now $65,000.

Where it goes wrong

The common miss is harvesting a gain that pushes income over a line for the premium tax credit, which costs more in lost credit than the tax that was saved.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Tax Topic 409, Capital gains and losses. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.