Capital Gain Harvesting Windows

The 0% Capital Gains Rate Most Investors Miss

Long-term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income. For 2024, the 0% rate applies to taxable income up to $47,025 for single filers and $94,050 for married filing jointly. Investors who fall below these thresholds can sell appreciated assets, realize gains, and pay no federal tax on those gains.

Capital gain harvesting is the deliberate realization of gains during low-income years to reset cost basis and eliminate future tax liability. A $50,000 unrealized gain harvested at 0% saves $7,500 compared to eventually realizing that gain at the 15% rate.

How the 0% Rate Works

The 0% rate is not a separate bracket. Instead, it applies when your taxable income (including capital gains) falls within the standard income thresholds:

2024 thresholds for 0% long-term capital gains:

Critical detail: These thresholds apply to taxable income, not gross income. The standard deduction ($14,600 single, $29,200 married filing jointly for 2024) reduces gross income first.

Calculation for married couple:

• Gross income limit: $94,050 + $29,200 = $123,250
• A married couple with $123,250 in gross income (wages, interest, dividends, and gains combined) pays 0% on all long-term capital gains

Identifying Your Harvesting Window

Certain life situations create opportunities for 0% gain harvesting:

Gap Years Between Jobs

A period of unemployment or career transition with minimal income provides harvesting opportunity.

Example: You leave a job in June, start a new job in January. Your six-month income gap creates low-income year. If taxable income stays below threshold, harvest gains before year-end.

Early Retirement Before Social Security

Ages 60-66 before Social Security begins often produce the lowest taxable income of your life.

Example: Retired at 62 with pension of $30,000 and investment income of $15,000. Married filing jointly with $29,200 standard deduction: taxable income = $15,800. Room to harvest $78,250 in gains at 0%.

Sabbatical or Leave of Absence

Extended unpaid leave creates temporary low-income year.

Graduate School Years

Full-time students with minimal earned income can harvest gains accumulated from earlier working years.

New Business Startup Period

Early years of entrepreneurship often produce losses or minimal income, creating harvesting opportunity.

Worked Example: Strategic Gain Harvesting for Early Retirees

Situation:

• Married couple, ages 63 and 61
• Retired early, no Social Security yet
• $500,000 taxable brokerage account with $150,000 unrealized long-term gains
• Small pension: $24,000 annually
• Investment income (dividends, interest): $12,000 annually
• Filing status: Married filing jointly

Step 1: Calculate baseline taxable income

• Pension: $24,000
• Investment income: $12,000
• Gross income: $36,000
• Standard deduction: $29,200
• Taxable income before gains: $6,800

Step 2: Calculate available 0% space

• 0% threshold: $94,050
• Taxable income used: $6,800
• Available 0% space: $87,250

Step 3: Harvest gains

• Sell appreciated positions to realize $87,250 in long-term capital gains
• Immediately repurchase same positions (no wash sale rule for gains)
• Tax on $87,250 gain: $0

Step 4: Calculate benefit

• Without harvesting, $87,250 gain eventually taxed at 15% = $13,088
• With harvesting at 0% = $0
• Tax savings: $13,088

Repeat annually: If income remains low, harvest additional gains each year until all unrealized gains are eliminated or income rises.

The Mechanics of Harvesting

Step 1: Identify Appreciated Positions

Review all taxable brokerage holdings for unrealized long-term gains. Long-term means held over one year. Short-term gains are taxed as ordinary income and cannot qualify for 0%.

Step 2: Calculate Your Available Space

Determine taxable income from all sources (wages, pensions, dividends, interest, Social Security). Subtract standard deduction. Compare result to 0% threshold for your filing status. The difference is your available harvesting space.

Step 3: Sell and Repurchase

Sell appreciated positions to realize gains. You may immediately repurchase the same security. Unlike tax-loss harvesting, there is no wash sale rule for gains. Your new cost basis equals the sale price.

Step 4: Document the Transaction

Record the sale date, proceeds, and gain for tax filing. The gain appears on Schedule D and Form 8949. Despite being at 0%, you must still report the transaction.

Net Investment Income Tax Consideration

The 3.8% Net Investment Income Tax (NIIT) applies to investment income when modified adjusted gross income exceeds:

• $200,000 single
• $250,000 married filing jointly

Investors with income above these thresholds pay NIIT even when capital gains fall in the 0% bracket. However, if your income qualifies for 0% capital gains, you're almost certainly below NIIT thresholds.

Effective rates considering NIIT:

Common Mistakes in Capital Gain Harvesting

Mistake 1: Forgetting Qualified Dividends Count

Qualified dividends receive the same preferential rates as long-term capital gains but also consume 0% space. If you have $30,000 in qualified dividends, you have $30,000 less room for gain harvesting.

Calculation error example:

• You assume $94,050 in harvesting room
• But you received $20,000 in qualified dividends
• Actual room: $94,050 - $20,000 = $74,050 at 0%
• The next $20,000 in gains would be taxed at 15%

Mistake 2: Harvesting More Than the Threshold

Realizing gains beyond the 0% threshold triggers 15% tax on the excess. There is no blending of rates.

Example: You harvest $100,000 in gains when you have $94,050 in 0% space. The first $94,050 is at 0%. The remaining $5,950 is taxed at 15% = $893.

The $893 is not wasted, you've still saved taxes compared to the full amount at 15%. But precise harvesting maximizes benefit.

Mistake 3: Ignoring State Taxes

Most states tax capital gains as ordinary income. California (up to 13.3%), New York (up to 10.9%), and other high-tax states do not offer a 0% rate.

Net benefit calculation:

• Federal savings: 15% on harvested amount
• State cost: Your marginal state rate on harvested amount
• Net benefit: Federal savings minus state cost

In California at the 9.3% bracket, harvesting $50,000 saves $7,500 federal but costs $4,650 state, netting $2,850 savings. Still worthwhile, but less dramatic.

Mistake 4: Triggering Social Security Taxation

For retirees receiving Social Security, capital gains count toward "combined income" that determines Social Security taxation. Realizing large gains can push up to 85% of Social Security benefits into taxable income.

Combined income formula:

• AGI + tax-exempt interest + 50% of Social Security benefits
• Above $32,000 (single) or $44,000 (married): Up to 50% taxable
• Above $34,000 (single) or $44,000 (married): Up to 85% taxable

Impact: A $30,000 gain harvest might trigger an additional $25,500 in Social Security becoming taxable, creating $6,120 in additional tax (at 24% bracket). This can eliminate or reverse the benefit of "free" gain harvesting.

Mistake 5: Not Accounting for IRMAA Lookback

Medicare uses income from two years prior to determine premiums. Harvesting gains in 2024 could increase Medicare premiums in 2026.

IRMAA thresholds (2024, for income reported in 2022):

• $103,000 single / $206,000 married: Standard premium
• Above thresholds: Additional $66.00 to $395.60 per person per month

If you're approaching 65, plan harvesting activity around the two-year lookback period.

Capital Gain Harvesting Checklist

Before year-end (October-November):

• Review year-to-date income from all sources
• Calculate taxable income projection (gross income minus deductions)
• Determine remaining room before 0% threshold
• Account for expected dividends before year-end
• Identify long-term gain positions in taxable accounts
• Check state tax implications

Execution:

• Sell appreciated positions to realize gains within 0% space
• Repurchase immediately (no wash sale restriction on gains)
• Document transactions for tax records
• Consider lot selection (sell highest cost basis lots if partial harvest)

Special situations to evaluate:

• If receiving Social Security: Calculate combined income impact
• If approaching Medicare: Consider IRMAA two-year lookback
• If in high-tax state: Calculate net benefit after state taxes

Annual review:

• Track remaining unrealized gains in portfolio
• Project future income years for additional harvesting opportunities
• Consider harvesting small amounts each year versus large amount in one year

Capital gain harvesting works best when combined with consistent annual evaluation of income and gains. The investors who benefit most are those who recognize low-income windows as they occur and act before year-end. Missing a 0% year means waiting for the next opportunity, which may not arrive for years.