Consider Capital Gains Harvesting—Not Just Tax-Loss Selling

As the year draws to a close, many investors consider tax-loss selling as a strategy to reduce taxable income or rebalance their portfolios. But there’s another powerful and often overlooked strategy: capital gains harvesting. When used correctly, harvesting gains can reset cost basis, rebalance portfolios, and reduce long-term tax exposure—all while capitalizing on favorable capital gains brackets.

A common misconception is that realizing capital gains can “push” you into a higher tax bracket. In reality, capital gains brackets depend on your taxable income, not the size of the gain. Only the portion of the gain that falls into each bracket (0%, 15%, or 20%) is taxed at the corresponding rate. This nuance of capital gains tax treatment requires careful attention and strategic planning to navigate optimally.

Here’s how it works. Assume a married couple filing jointly earns $100,000 of gross income before capital gains. The standard deduction for MFJ is $31,500. The One Big Beautiful Bil Act introduced a temporary $6,000 bonus deduction for each taxpayer age 65 or older. If one spouse qualifies, their taxable income drops to $62,500 ($100,000 – ($31,500 + $6,000)).

The 0% long-term capital gains bracket for MFJ extends to taxable income up to $96,700. This couple can therefore realize $34,200 of gains tax-free. If they realize $50,000 in long-term gains, $34,200 is taxed at 0 percent and the remaining $15,800 at 15 percent, resulting in a total federal capital gains tax of $2,370—an effective tax rate of just 4.74%.

Looking deeper, $50,000 of gains on $200,000 of proceeds implies a $150,000 basis. Paying $2,370 in tax equals only 1.2% of the sale proceeds. If the position declines even 1.2% after not selling, you’ve effectively lost the value of the tax you were trying to avoid—and you still have $47,600 of unrealized gains.

So why would you realize gains if you don’t need the cash? Several reasons:

Resetting cost basis. Raising your cost basis can reduce or eliminate future capital gains taxes when you eventually sell. You can immediately repurchase the same investment, as wash-sale rules do not apply to gains.

Rebalancing intelligently. Trimming concentrated, low-basis positions in the zero percent bracket lets you reinvest the proceeds to align your portfolio with your long-term allocation.

Locking in gains. Selling gradually enables you to manage taxes over time rather than confronting one large gain later. And if future tax laws increase capital gains rates, realizing gains now secures today’s lower rates.

Additionally, harvesting gains can reduce the psychological “lock-in” effect—the reluctance to sell solely to avoid taxes.

Keep in mind: this is a simplified example. It doesn’t factor in losses that can offset gains dollar-for-dollar or the additional $3,000 deduction against ordinary income. Managing a tax-efficient portfolio can be complex, so it’s wise to work with a tax professional and financial adviser to ensure your strategies align with your long-term financial goals.

If you have questions on how to manage your capital gains, the experts at Henssler Financial will be glad to help: