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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.

Ari Brodsky
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BlackThorn
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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. –  Jul 20 '17 at 21:21
  • The UK term for this is "bed and breakfast" - see http://www.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

3 Answers3

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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.

D Stanley
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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.

JTP - Apologise to Monica
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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
  • haha, of course. Friendly, not professional advice. I see now how dividing your assets into different sectors can be beneficial, at least for harvesting losses. Next time I sell I'll give some thought into splitting it up. Yes, I use the S&P 500. – BlackThorn Jul 20 '17 at 16:58
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    This is useful info, but it's not an answer to the question. – BrenBarn Jul 21 '17 at 03:00
  • This is an absolutely excellent idea.... I'm kind of shocked it never occurred to me to hold sector funds in my taxable account to harvest the tax efficiency.... – quid Jul 21 '17 at 17:57
  • @quid, thx. Fees may be slightly higher. Do the math to see if the cost is offset by the savings this strategy creates. – JTP - Apologise to Monica Jul 21 '17 at 18:02
  • @BrenBarn - agreed, it was really an add-on to the accepted answer. But too long for comment. – JTP - Apologise to Monica Jul 24 '17 at 01:07
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One term for what you have done is "reset your cost basis".

James
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