The 0% long-term capital gains tax rate has been around since 2008, and it lets you take a few steps to realize tax-free earnings on your investments. Harvesting capital gains is the process of intentionally selling an investment in a year when any gain won't be taxed. This occurs in years when you're in the 0% capital gains tax bracket.
This chart shows the long-term capital gains tax rates for 2021.
How the 0% Rate Works
The 0% tax rate on capital gains applies to married taxpayers who file joint returns with taxable incomes up to $80,000, and to single tax filers with taxable incomes up to $40,000 as of 2020.
There can be years when you'll have less taxable income than in others. You can sometimes make a low-tax year occur on purpose in retirement by choosing which accounts to take withdrawals from each year.
These tax rates apply only to long-term capital gains on assets you've held for more than one year. Short-term rates would apply if you hold assets for one year or less. These are taxed according to your ordinary income tax bracket.
The most common tax planning opportunities occur if you are:
- Temporarily unemployed
- A salesperson whose income varies from year to year
- Between the ages of 55 and 70 and might soon be transitioning into retirement or are already retired
Let’s say you’re married and your taxable income this year, calculated after subtracting your itemized deductions or standard deduction, is going to be about $60,000. You have room for more income before you hit the 15% long-term capital gains bracket—$20,000 before you hit that $80,000 threshold.
You have a tax-planning opportunity if you own stocks or mutual funds in a non-retirement account and some of them have unrealized long-term gains. You can exchange your investment for something similar so your portfolio allocation and risk tolerance stay about the same, and that unrealized gain now becomes a realized gain.
You could have up to $20,000 of realized gains and pay no income tax on them in this example.
Have some information at your fingertips before you start harvesting gains.
- Mutual funds distribute capital gains by the end of each year. The gains will likely be minimal if you own tax-managed funds or index funds, but funds that aren't managed with taxes in mind can generate large gains. You should find out what this gain will be before you intentionally realize additional gains.
- Check your tax return to see if you have a capital loss that's being carried forward from a previous year. Check with a tax professional if you're not sure or can't tell. Past losses can carry forward indefinitely. They're first used to offset gains, then $3,000 of a capital loss can be used to offset ordinary income if you have no gains. Your gains will first use up all your old losses if you have capital losses that are being carried forward and you realize gains.
- Make sure you have an accurate estimate of what your tax situation for the year. It's best to work with a tax professional or a financial advisor for these projections unless you're at least somewhat investment-savvy. You might also run multiple scenarios through online tax preparation software to help you do your planning.
Benefits of Harvesting Gains for Retirees
Gain harvesting can be an effective way to realize tax-free gains, but you must build a habit of projecting taxes and looking for tax opportunities by the end of each year to make it work. You can reduce your tax bill during your retirement years by doing this consistently, which means more of your retirement income goes in your pocket.
But a miscalculation could be a costly mistake, so get help from a professional if you're at all unsure of your taxable income.
Frequently Asked Questions (FAQs)
Do capital gains count as income?
Capital gains will count toward your adjusted gross income for tax purposes. Capital gains income can bump you up into a higher tax bracket if you earn enough through investing and trading.
What is the capital gains tax rate on stocks held one year or less?
Short-term capital gains are taxed as normal income at your normal income tax bracket rate.