A great idea... I think?
I have an idea but I want to check if I'm missing anything.
First, a couple of fundamental facts:
1) Stock gains are taxed once you sell your holdings, with the amount of tax determined by your tax bracket.
2) Your tax bracket is determined by your income from the year you sell.
3) For example, if you are single with an income under $40k in the year in which you sell, you pay 0% on any stock gains (long term gains only), no matter how big those gains are, and even if you made $100k the year before and $100m the year after you sell.
THEREFORE...
If your income is under $40k but might rise in a future year, you can save money by selling all your holdings and then buying them right back (waiting a month by law).
Once you eventually sell again, you would only pay taxes on the amount they rose from now, not when you originally bought them.
Any caveats that may make this idea a bad one? Let me know!
I think it makes sense to sell and buy back some stocks you have gains on to reduce future taxes. But a couple things to keep in mind. If you’re in a lower tax bracket you probably don’t have much money in a taxable account to begin with and also probably don’t have a lot of money to pay extra taxes you don’t need to. If you’re making less than a 100k most of your investing should be done in tax-sheltered retirement accounts. If you’re making more it might not be worth the tax hit. Also selling is always risky and time consuming if you’re selling a significant amount of positions. You have to factor in bid/ask spreads, timing on holding period, and timing on settlement dates, along with the volatility of the market itself.
In terms of selling you don’t have to wait a month to buy back a stock if you’re selling something with a gain. The wash rule is only for stocks you’re selling at a loss. But if you do sell stocks with gains it can be useful to sell some losses and put them into a higher conviction position at the same time. I actually just did this recently. Sold my gains in Apple, my losses in META and NVDA and immediately bought back my Apple shares plus a little more w the capital from the shares of META/NVDA at a loss. No wash rule and I’ll pay a little in cap gains on Apple and I can buy back META/NVDA in a month if I want to avoid the wash rule on those.
