You made a great investment, whether it be in your brokerage account or something tangible like real estate. Now, it makes up a significant amount of your net worth but selling means paying taxes. So, as it often goes, you plan to hold onto the asset until the very end, hoping your family diversifies after getting a step-up in basis. Meanwhile, the investment continues to grow, representing a larger and larger share of your net worth every year you don’t sell, leaving you with an uncomfortable level of concentration risk.
What if you could sell your winners and pay 0% federal tax on the proceeds? With careful, intentional planning, “capital gains harvesting” can enable you to your trim concentrated positions, reset your cost basis, and/or diversify the proceeds tax efficiently.
You’re likely familiar with “tax-loss harvesting”, in which you deliberately realize capital losses to offset gains elsewhere. Think of this as the opposite, in which you purposely realize capital gains to take advantage of favorable long-term capital gain rates.
Let’s review how this works.
Long-Term Capital Gains (and Qualified Dividends) Tax Rates
Like ordinary income, long-term capital gains are subject to a marginal federal tax system. However, ordinary income tax rates range from 10%-37%, while long-term capital gains fall into a more favorable range of 0%-20% (excluding the 3.8% Net Investment Income Tax for simplicity):
You may be thinking you earn too much to qualify for the 0% long‑term capital gains rate but remember that taxable income is calculated after deductions. This primarily includes itemized deductions and the standard deduction, but also the new enhanced senior deduction, pre-tax retirement account contributions, HSA contributions and other adjustments. Taken together, these deductions can meaningfully reduce taxable income, and with the right planning, turn harvesting capital gains into a viable strategy.
Example: Robert and Debbie Retiree
In this example, Robert and Debbie have $46,700 in total deductions. Meaning, they can generate up to $46,700 in income without incurring any federal tax liability, before factoring in the ordinary income tax brackets or capital gains tax brackets.
Scenario 1:
In 2025, Robert and Debbie sold an investment, realizing a $110,000 long-term capital gain. Assuming this is their only taxable income, they owe $0 in federal tax.
After applying their $46,700 in deductions, their taxable gain is reduced to $63,300, which remains within the 0% long-term capital gains bracket:
This means they can “harvest” an additional $33,400 in long-term capital gains without incurring a federal tax liability:
$96,700 (0% long-term capital gains bracket) - $63,300 (capital gains after deductions) = $33,400
Note:
- State taxes may still apply. For example, California does not offer a preferential rate for long-term capital gains, therefore they are taxed as ordinary income.
Scenario 2:
In 2025, Robert and Debbie sold an investment, realizing a $143,400 long-term capital gain. Assuming this is their only taxable income, they owe $0 in federal tax.
After applying their $46,700 in deductions, their taxable gain is reduced to $96,700, which remains within the 0% long-term capital gains bracket:
Note:
- If Robert and Debbie realize additional capital gains beyond $96,700, every extra dollar would be taxed at 15%. For example, if their taxable long-term capital gains totaled $96,701, only that extra $1 would be taxed at 15%, while the $96,700 remains in the 0% bracket.
Scenario 3:
In 2025, Robert and Debbie sold an investment, realizing a $96,700 long-term capital gain and separately have $46,700 in ordinary income. Again, they have a $0 federal tax liability.
Income deductions always offset the least tax-efficient income first. So, Robert and Debbie’s combination of deductions eliminates their $46,700 in ordinary income, leaving $96,700 in long-term capital gains, which remains within the 0% long-term capital gains bracket:
Scenario 4:
In 2025, Robert and Debbie sold an investment, realizing a $50,000 long-term capital gain and separately have $100,000 in ordinary income. In this example, they have a federal tax liability.
Their taxable ordinary income is reduced to $53,300, after being partially offset by their $46,700 income tax deduction, resulting in a federal tax liability of $5,919:
Next, Robert and Debbie apply their $53,500 in taxable ordinary income to the long-term capital gains tax bracket. The $53,500 in taxable ordinary income essentially sets an income tax floor, partially filling their 0% capital gains bracket, and leaving only $43,400 available at the 0% rate:
$96,700 (0% long-term capital gains bracket) - $53,500 (taxable ordinary income) = $43,400
So, the first $43,400 in gains are taxed at 0%, while the remaining $6,600 is taxed at 15%, resulting in a federal tax liability of $990:
The tax code is structured so that ordinary income is accounted for first when determining tax liability. After deductions reduce ordinary income (or eliminate it entirely like in scenario 3), long‑term capital gains are effectively “stacked” on top. In this fourth scenario, Robert and Debbie’s $50,000 in long-term capital gains are “stacked” on top of their $53,300 in ordinary income, resulting in $103,300 in total taxable income and a $6,909 federal tax liability.
Bottom Line
As the scenarios above illustrate, understanding how to properly navigate the tax code can result in considerable savings, specifically when dealing with unrealized capital gains.
Like Robert and Debbie’s first scenario, if you’re expecting a lean income year and are holding onto appreciated assets, don’t let the calendar year change without filling up your 0% federal long‑term capital gains bracket. Even if you want to maintain your current investment, harvesting gains allows you to reset your cost basis by selling and immediately repurchasing the same position, while not being subject to the 30-day wash-sale rule that applies when harvesting losses.
If you’d like to harvest gains but worry your taxable income is too high, you can often create room in the 0% capital gains bracket with thoughtful planning. Strategies to consider may include:
- Bunching Charitable Gifts
- Consider using a Donor Advised Fund (DAF) to bunch several years of giving into one tax year. You capture a large income tax deduction now, while completing the grants to charities over time.
- Make a Qualified Charitable Distribution (QCD)
- Consider donating to a public charity directly from your pre-tax IRA. The donation can help satisfy all or part of your required minimum distribution (RMD) without increasing taxable income.
- Contribute to pre-tax retirement accounts
- If you have earned income, consider making deductible contributions to your pre-tax retirement account (traditional IRA, 401(k), etc.).
- Delay Social Security
- While benefits are available starting at 62, up to 85% of the benefit can be included in taxable income, which can reduce the room available in the 0% long-term capital gains bracket. Cashflow permitting, consider delaying benefits.
- Invest in Real Estate
- Rental real estate can offer unique tax advantages. Through accelerated depreciation and cost segregation studies, investors can often offset all or some of their rental income, keeping taxable income low.
- Contribute to an HSA
- Assuming you’re covered by a high-deductible health plan (HDHP), contributions to an HSA can be an easy way to reduce taxable income without requiring earned income.
If you’re unsure about your income tax deductions or what your taxable income will be this year, we strongly suggest consulting with your accountant or financial advisor. With the One Big Beautiful Bill Act (OBBBA) permanently increasing the standard deduction, introducing a temporary enhanced senior deduction through 2028 and increasing the SALT cap to $40,000 through 2029, this is an opportune time to evaluate whether capital gains harvesting makes sense for you.