34

Every year or so, I sell my investments and then immediately buy them again. I do this because I'm in a low enough tax bracket that I don't have to pay capital gains on my long term investments, so I'm trying to capture as many gains as I can before I rise into a higher tax bracket. I talked to someone a while ago about this and he had a name for it, but I can't remember what it is. Does anyone know what this strategy is called?

In case it is relevant, my investments are all index funds.

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    Isn't this tax evasion? – S. G. Jul 20 '17 at 19:52
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    @SethGreylyn: Nope. Abusing loopholes with full reporting is not tax evasion. If the IRS wants to call you on it they have all the information in front of them. – Joshua Jul 20 '17 at 20:23
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    @SethGreylyn A wash sale would be, but that involves selling securities at a loss and then buying them back. – Michael Jul 20 '17 at 21:21
  • The UK term for this is "bed and breakfast" - see investopedia.com/terms/b/bed-and-breakfast-deal.asp. Comment as a) I don't have enough rep to answer this locked question; b) the OP is asking about US, not UK. – Martin Bonner supports Monica Jul 22 '17 at 19:41
  • @SethGreylyn It's tax avoidance, rather. – Brian Oct 25 '17 at 15:03
47

It sounds like you're describing tax gain harvesting, where you intentionally realize capital gains in a low-tax-rate period in order to increase your cost basis and reduce future capital gains at higher rates.

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  • Cool! I don't believe that was the term he used, but it definitely fits the bill. I'll accept your answer unless someone provides a clearly superior one soon. – BlackThorn Jul 20 '17 at 16:49
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    Here in the UK, we call it "CGT harvesting". – Kaz Jul 20 '17 at 22:22
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    In the UK we also call it "bed-and-breakfasting". – Mark Pattison Jul 21 '17 at 8:14
  • It matches the definition of tax optimisation: bris-group.com/difference-tax-planning-tax-optimisation but it is a very broad term – mpasko256 Jul 21 '17 at 11:44
15

D Stanley gave a correct answer. Let me offer an observation. In a year where any of your investments are down, I'd suggest taking the loss (being mindful of wash sale rules), and use it to offset up to $3000 of ordinary (15%) income or to offset the tax of a Roth IRA conversion. Then in future years, continue to use the tax gain harvest strategy.

And note, that even in a year where the S&P or general market is up, one sector might be down. This depends on what type of indexes you are tracking.

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  • To harvest capital losses, do your investments have to be long term? – BlackThorn Jul 20 '17 at 16:47
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    No. If all you have taken is a loss, it's a loss. For active traders, we need to first offset long-tern gains against long term losses, short against short, etc. For you, this would be a non-issue. – JTP - Apologise to Monica Jul 20 '17 at 16:48
  • Awesome, good stuff here. I see your edit mentions sectors of the the S&P being down during an up year, but I thought that for tax purposes, my share of the index was what counted, not the individual stocks comprising it. – BlackThorn Jul 20 '17 at 16:52
  • It sounds like you have a broad index fund. No problem. Look at the Spiders ETFs, and you'll see how you might have sector indexes. But don't take this as 'advice'. – JTP - Apologise to Monica Jul 20 '17 at 16:54
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    This is useful info, but it's not an answer to the question. – BrenBarn Jul 21 '17 at 3:00
4

One term for what you have done is "reset your cost basis".

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