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Suppose my 2020 income is $25k, and I have $15k in unrealized long-term capital gains in shares of company X. In 2021 and beyond, I expect my income to be $40k+. I consider the shares of company Y to have equal upside potential as company X. I live in a state which treats capital gains no differently than ordinary income.

Aside from having to pay state taxes on $15k, is there any downside to selling company X and buying company Y with the proceeds in order to avoid paying federal taxes on the $15k long-term capital gain?

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  • Buying company Y doesn't erase the capital gain. You still have to pay taxes on it.
    – chepner
    Nov 19 '20 at 19:58
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The downside is paying some taxes now, albeit at a lower rate along with a reduction in your long term compounding. The upside is paying less net taxes on the gains.

Since I retired 20 years ago, my income income has been variable so I have done this in lower income years. That includes IRA conversions and withdrawals and that amount will be higher this year due to reduced income because of this year's modest market gains due to the pandemic.

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  • Thanks for the reply. I am recently retired, and the question is one of many that pops into my head about how to best utilize the various components of my nest egg.
    – jmtt77
    Nov 20 '20 at 9:19
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I would take the deal and realize my long term capital gains now if you are certain your net income for the year will be less than $40,000.

Depending on your state, you might pay a little bit in state taxes, taking a small bite from your long term compounding potential, but that is easily more than made up by the fact that you will pay 0% in federal long-term capital gains tax. Compare that to a higher income year in the future that could cost you at least 15% in federal long-term capital gains taxes.

Also, keep in mind that you do not need to buy shares from Company Y to accomplish this. You could just buy right back the same shares from Company X and this would not have any consequences to your taxes because you're selling at a gain, not a loss, so the wash sale rule does not apply.

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  • I only added the Company Y detail to make clear that lost future appreciation of Company X should not be viewed to be a potential downside, but it's helpful to know that the wash sale rule doesn't apply in the case of a gain. Thanks for the reply.
    – jmtt77
    Nov 20 '20 at 9:17

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