A stock market rally is the time to use this ‘strategic chess move’ for capital gains, advisor says

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If the current stock market rally added profits to your portfolio, a lesser-known strategy could help rebalance your assets or reduce future taxes.

The strategy, known as tax-gain harvesting, allows you to leverage lower earning years by strategically selling profitable brokerage account assets.

“Tax gain harvesting is like a strategic chess move in the world of investing, ideal for those in the 0% long-term capital gains tax bracket,” said certified financial planner Sean Lovison, founder of Philadelphia-area Purpose Built Financial Services.

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“Combined with multi-year tax planning, it is a smart play when you’re in a low-income year but expect to be in a higher tax bracket in the future,” said Lovison, who is also a certified public accountant.

How tax-gain harvesting works

You can use tax-gain harvesting when you fall into the 0% capital gains bracket, which applies to long-term capital gains or assets owned for more than one year. 

For 2023, you may qualify for the 0% rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly. Those thresholds are even higher for 2024, adjusting to $47,025 for single filers and $94,050 for married couples.

These rates apply to your “taxable income,” which is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.

However, you also need to consider state capital gain taxes because “every state is a bit different,” warned Stephen Maggard, a CFP and enrolled agent with Abacus Planning Group in Columbia, South Carolina.

Resetting the basis can be a ‘game-changer’

One of the perks of tax-gain harvesting in the 0% bracket is the chance to reset the asset’s purchase price, or “basis,” according to Lovison. 

“This move can be a game-changer” because it can significantly reduce future taxable gains, especially when selling profitable assets in higher earning years, he said.

While the so-called wash sale rule blocks a tax break for losses when investors repurchase the same asset within 30 days, that doesn’t apply to harvested gains, Lovison said. This means you can sell and immediately repurchase the same asset to increase the basis.

The 0% capital gains bracket could also be an opportunity to “rebalance or divest of a concentrated position,” especially for new retirees who haven’t yet started required minimum distributions, said CFP Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.

The S&P 500 rally will likely continue into year-end, says Tiffany McGhee
Source: CNBC