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Pay Now or Pay Later? Capital Gains Harvesting With Changing Tax Rates  


Author:  Matthew Gelfand, Ph.D., CFA, CFP.


Source: Volume 27, Number 03, Spring 2010 , pp.31-42(12)




Journal of Taxation of Investments

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Abstract: 

This article explores the conditions under which accelerating or postponing realizations of capital gains under changing tax rate environments is preferable. The analysis will show that if the rate of anticipated future after-tax capital gains is lower than the proportionate increase in the capital gains tax rate, then it pays to realize capital gains early in order to pay taxes at the present, lower tax rate. Notably, as this research will show, this condition is entirely independent of the amount of unrealized capital gains prior to the tax rate change. Thus, even investors who have enjoyed great success in building up significant gains so far should still take advantage of early realization opportunities afforded by prospective tax law changes if they expect either large tax rate increases or modest future capital gains or both.

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