Tax Gains Harvesting: How to use it and why it's useful

Tax gains harvesting is when you sell a stock at a gain. Sell high, buy low, right? Tax gains harvesting can be valuable when you've already locked in some losses during the year, if you are in a lower tax bracket this year vs next, of even if you just want to sell things you've made money on. We outline how to think about this in this video.

Check out the related video on Washington state long-term capital gains tax!

Transcript:

On today's video, we'll be talking about tax gains harvesting. I'm Chris Kaminski, co-founder and partner with Consilio Wealth, where we specialize in working with technology professionals at Amazon, Microsoft, Meta, and Google.

Tax gains harvesting is when you sell a stock at a gain. That could be because it's done well and that means you have an overweight position in that holding or just because you want to sell it. Now, what's the key here? Now you might imagine that this is pretty simple.

When you're a client of a firm like ours, we have a very rules-based and objective approach when we sell something and buy something else. And our objective is to sell things that are making money because those things that are making money are probably an overweight in portfolios and then rebalance into the things that are not performing as well because generally speaking over time, all of that works out.

Sell high, buy low. You've heard this before. It's much harder to do on your own, however, and we see this with clients a lot where they're holding onto the thing that's done really well in their portfolio because it's done really well and so they don't want to sell it. Tax gain harvesting can be helpful when you have a gain, and you otherwise are letting the tax tail wag the investment dog and you just need to sell.

Tax gain harvesting can be valuable in the following situations. When you've already booked some losses throughout the year. Let's say that you have... 30, 40, $100 ,000 in losses that you booked in because some other stocks that you owned or some other portfolios, maybe it's you're working with a firm like ours that does tax loss harvesting and you have losses in one of your accounts that you can use against gains in one of your other accounts. That helps the sting of selling the thing that's done well because you have to pay tax to do so go down, because you can use those losses against those gains.

Number two is if you are in a lower tax bracket this year and say last year and next year, possibly you were in higher tax bracket you project, you're going to be in a higher tax bracket. This could be an optimal tax year to book more gain. Long -term capital gains are subject to 15% tax at the federal level. That escalates to 20% tax at the federal level above a certain income. And in addition to that, you'll pay the net investment income tax, which is 3.8 % above, again, a certain income level.

I would encourage everyone to just Google this because these numbers sometimes change year over year. So, Google long -term capital gains tax thresholds and Google net investment income tax thresholds and you'll learn more.

Also, in another video, we talked about the Washington State capital gains tax. This is a long -term capital gains tax on sales of stock above $250,000 in a given year. Note that I said long-term capital gains, not short-term capital gains. So, this new tax with Washington State is only subject to long-term capital gains, not short-term. So, I recognize that the psychology sometimes is counterintuitive with selling the thing that's done really well. But if it's become an over concentration in your portfolio and you've held it for a long time and you have losses elsewhere, you could have a good opportunity to book that or lock in that sale at less tax, or as I said, if you're in a lower income tax bracket year, it could be an opportunity as well.

Lastly, if you're none of those things and you just want to sell, just sell, it's okay. It's okay to sell things at a gain, it's okay to make money. Last comment here is that we commonly coach clients to sell holdings at less gain.

Now I want to note that this is typically applicable to somebody that is working at a company, that they've been there a long time, so they have a lot of stock in that company, and they have a range of cost basis or vest prices. The point in saying this is, let's say that you just had a vest a week ago, selling that vest won't really incur any additional capital gain or loss because the stock probably hasn't had a chance to move a whole lot since your vest price. And of course, your vest price is your purchase price of those shares and it's only the sale price above or beyond that price that would be subject to taxes.

If you've been there a long time and you select an older lot, let's say one that's up 100% or 200%, depending on how well the stock's done, that will of course incur more tax. We are commonly coaching clients to sell their newest vests first because those tend to have the least amount of gain.

So just take note as you're looking through all of your various lots, what makes most sense for you. But the psychology behind selling the thing that hasn't had a chance to gain a whole lot, I recognize is not nearly as fun as or as satisfying as selling the thing that's up 100% or 200%, but just think about it in the terms of taxes. If you're trying to sell, say, $50,000 of stock, what's the cheapest way you can get that $50,000 of stock out of the stock and diversify? And the answer is your highest cost basis.

All right, that's it for today's video. That was helpful.