Harvesting gains is similar in some ways to harvesting losses.
Many investors should be considering a different tax strategy for the end of 2012. The future of the current tax rate on capital gains is in question. The new Medicare surtax on those with incomes over $200,000 is certain (tax begins January 1, 2013). Instead of harvesting tax losses this fall, some investors should consider harvesting gains.
Harvesting gains is similar in some ways to harvesting losses. The concept is to sell appreciated securities that you’ve held for at least 12 months to realize the long-term gain for tax purposes. You can immediately repurchase the same asset because there is no wash sale rule for realizing gains. This allows you to pay tax on the gain in 2012, when rates are low, and establish a new cost basis in the asset to minimize increased gains that may be taxed at higher rates.
Anyone in the 15% tax bracket this year should seriously consider realizing gains up to the top of the 15% tax bracket. Long-term capital gains are taxed at 0% this year and may be taxed at 8-10% in 2013. The 8% tax rate applies to assets held five years or longer. The 10% tax rate applies to assets held 1 to 5 years. Those living in states that tax capital gains should consider the state tax implications of this strategy.
This strategy is also appealing to anyone that will be subject to the Medicare surtax. If the current tax laws expire, the tax rate on long-term capital gains will jump from 15% to 23.8% (21.8% for assets held more than five years). Those taxpayers that fall between these two income levels will need to carefully evaluate their individual circumstances to determine if capital gain harvesting makes sense. Consider whether you expect to need cash in the next five years that would come from the sale of assets. The assets should stay invested for at least five years to benefit from paying the tax early.