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Capital Gains Harvesting With Changing Tax Rates: Another Update  


Author:  Matthew D. Gelfand.


Source: Volume 38, Number 02, Winter 2021 , pp.51-59(9)




Journal of Taxation of Investments

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Abstract: 

With the change in Administrations, it seems quite likely that higher tax rates will be a subject of much discussion in 2021. The discussion likely will include tax rates on realized capital gains. Candidate Joe Biden expressed interest in raising the highest-bracket, regular income tax rates to levels that prevailed during the Obama Administration, 39.6 percent, and changing capital gains to regular taxation. These combined changes would bring the capital gains tax rate on high-income earners to the highest level ever. This article updates previous work on investing decisions in the face of changing tax rates. It quantifies the trade-off that capital investors face between realizing capital gains sooner and paying taxes earlier than necessary but at current low tax rates, versus continuing to hold otherwise attractive assets in order to compound gains further but potentially being subject to future high tax rates. The trade-off depends on how high new tax rates might climb and how long investors might expect to hold their capital assets in the absence of tax rate changes. The article provides numerical examples based on specific tax change scenarios.

Keywords: capital gains; capital gains taxes; realized capital gains

Affiliations:  1: Moreland Associates, LLC.

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