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Tax Gain Harvesting?

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.

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 the 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 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 such strategies. 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.

DISCLOSURE 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.  Positions are subject to change without notification.


2 Responses to Tax Gain Harvesting?

  1. Jim Boy Bob December 2, 2011 at 7:31 am #

    Mr. Barnhart, nice article. I read somewhere that the “wash rules” only capital losses, however, bumping yourself into a higher tax bracket is certainly a concern.

    In the same regard as windfall taxes, I have heard others argue against placing pre-tax income into a retirement plan (i.e. 401k, SEP, IRA, etc). Namely, with budget concerns and the “handcuffs” placed on that money until a “qualifying event” occurs, like retirement, job loss, financial hardship, etc., that one should consider NOT putting money into these vehicles due to higher taxes in the future. Namely, why should someone try to shield income at a 35% tax rate today and pay a much higher tax rate in the future?

    Some could argue that if you do everything correctly… save, invest, compound over time…when it comes time to withdraw those savings, you will be in such a high tax bracket that you end up paying more in taxes in retirement than during your worling years. The retirement income is so high that social security becomes taxable, deductions are eliminated, etc. It seems that 401k could be the one of the best tax revenue generating schemes ever. Lastly, of course, one cannot ignore the company match offered by many employers…

    • Ted Barnhart December 2, 2011 at 8:51 am #


      In regards to the wash rules, that is my understanding as well, but as I mention I am not a tax professional. The other thing to keep in mind is that you never know when the rules are going to change.

      As far a the 401(k) / IRA comments, I agree with that line of thinking, and ,in fact that thought is in my queue of ideas to write about on the blog. I would add emphasize the point about the matching contribution however.

      If an individual is eligible for a matching contribution I would generally suggest contributing to the extent that one maximizes the company contribution.

      Finally, thank you for the heads up on the typos! Sometimes when I go back and read old entries, I can’t believe that I actually triple and quadruple proof read any of them. Something always gets through.

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