You may not have heard of tax gain harvesting but you probably are already be familiar with tax loss harvesting. The process of tax loss harvesting is to sell a stock that is currently worth less than your cost basis in order to claim the loss on your taxes. When you do this you have to watch out for the wash sale rule which states that you can’t replace the stock you sold with the same or a substantially similar investment in the next 30 days or your loss will be disallowed.
The idea of tax gain harvesting is to sell a stock that is currently worth more than your cost basis in order to claim the gain on your current year’s taxes. The reason you would do this is because you expect your tax rate for capital gains to be higher in the future. The current 0% and 15% rates on capital gains are scheduled to go up to 10% and 20% next year. This may change due to the fiscal cliff negotiations, but it seems likely that there will be some sort of increase in the near future. Also, there is a 3.8% Medicare tax on unearned income that starts in 2013 for high income filers, which is defined as those with an AGI over $200,000 or $250,000 for married filing jointly. This means that even if the current capital gain rates hold, higher income filers will have an extra 3.8% tax on capital gains. It makes sense for higher income filers to do their tax gain harvesting this year.
One thing that confuses many people in regard to tax gain harvesting is the wash sale rule. The wash sale rule is only for capital losses. If you are doing tax gain harvesting you do not need to worry about the wash sale rule. You could sell your stocks and buy them back the next day. You would have a capital gain to claim and you would have a new basis.
If you have capital gains in your portfolio, now is a good time to look at whether tax gain harvesting is a good move for you. If you wait until January, you might be stuck with higher capital gain rates.