Is It Time for Tax Gain Harvesting?

Written by: Ted Barnhart

In an earlier post, I discussed the potential drawbacks of the annual investor rite of passage know as Tax Loss Harvesting.

I am sure many people would politely disagree with such thinking.  That same group of people would thus surely think I have completely lost my mind when I suggest the next topic:  The idea of realizing investment gains so as to pay taxes now rather than later: tax gain harvesting.

As mentioned in the earlier post the current long term capital gains tax rate of 15% is not likely to be around forever, and could very well be a victim of the U.S. budget and deficit debate.  Indeed the Simpson Bowles recommendation  would tax all capital gains at the ordinary income rate.  While the Simpson Bowles plan would lower the individual rates (in exchange for elimination of many deductions) the top rate would still come in at 28%, resulting in an 86% increase in the long term capital gains tax for the top rate.

In addition starting in 2013 the Patient Protection and Affordable Care Act, aka ObamaCare, will levy a 3.8% tax on investment income and gains for individuals with gross income in excess of $200,000 and couples greater than $250,000.

Investors could also consider locking in capital gains to avoid the theoretical threat for windfall tax gains for investments that fared extraordinarily well, while the economic and financial crisis worsened.

Those who fear economic Armageddon often fret that gold would be confiscated by the government if such a crisis were to unfold.  I would counter that the government won’t bother to confiscate the gold, they will simply confiscate the profits via a special windfall tax provision.

However unlikely such an event may be, an investor in gold or silver could reduce such a threat by locking in existing long term gains, then buying back the security to establish a “higher” cost basis that would thus be exposed to such a potential tax.  It should be noted that under current law gold (and silver) is considered a “collectable” by the IRA and if held for more than a year taxed at a maximum rate of 28%, and NOT the 15% rate.  Investors who would like to engage in such a strategy of tax gain harvesting need to consult a tax professional and in particular how the wash sale rule, which is geared towards, tax losses, could be applied to gains.

It is critical that investors consult with a tax professional when considering tax gain harvesting. Anything that increases   income can have the effect of eliminating various tax deductions, credits and taking large capital gains at long term rates can also have a dramatic effect on the Alternative Minimum Tax (AMT) calculations.


DISCOLSURE AND DISCLAIMER: Nothing in this article should be construed as a personal recommendation or investment advice.  Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any particular investment security.   Investors should conduct their own due diligence and seek the advice of a financial and/or investment professional before making any investment decisions.

Barnhart Investment Advisor is NOT a tax advisor and does not provide specific tax advice.  All investment related tax strategies and decisions should be discussed with a qualified tax professional before implementing.

As of the date of this writing, Barnhart Investment Advisory Model Portfolios, clients and principal hold positions in the SPDR Gold ETF (GLD) and the SPDR Silver ETF (SLV).  Positions are subject to change without notification.


Is It Time for Tax Gain Harvesting?

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