Tax Harvesting Strategy
Realize capital gains or losses in specific years to manage the basis ratio of taxable accounts, offset other capital gains, or fill the 0% long-term capital gains bracket. Stratum honors IRS capital-gains netting rules and tracks carryforwards; it does not enforce wash-sale compliance.
How it works
Tax Harvesting allows the advisor to schedule explicit capital gain or loss realizations in a taxable account in specified years. Gain harvesting is typically used to fill the 0% long-term capital gains bracket (MFJ 2024: up to $94,050 taxable income after deductions) or to increase basis before a planned sale, reducing future capital gains on withdrawal. Loss harvesting is used to offset realized gains in the same year, offset up to $3,000 of ordinary income if net losses exceed gains, or create a carryforward loss for future use. Stratum applies the full IRS netting sequence (short-term vs. short-term, long-term vs. long-term, cross-offset rules), tracks net losses that exceed the $3,000 annual limit into carryforwards, and adjusts the account's basis ratio accordingly. The strategy does not enforce wash-sale compliance — the advisor manages the 30-day repurchase window with the client at execution time.
1. Configure Harvest Events
For each harvest event, the advisor specifies: year, taxable account (or pool), amount, direction (gain or loss), holding period (short-term or long-term), and a description. Multiple harvest events can be scheduled in the same year across different accounts.
Example: Year 2026, Joint Taxable Account, Long-Term Gain, $50,000, 'Harvest gain to fill 0% LTCG bracket before retirement income begins'2. Validate Harvest Limits
Stratum applies two hard limits at harvest time: (1) Gains cannot exceed the account's market value as of the harvest year — you can't harvest a gain from a depleted account. (2) Losses cannot exceed the account's cost basis as of the harvest year — losses represent already-taxed dollars being recognized as a decline, so they are capped at basis. Harvests violating either limit are silently truncated to the limit.
Max Gain = Account Value (harvest year) Max Loss = Account Basis (harvest year)
Example: Account value $300k, basis $180k. Advisor requests $400k gain harvest → truncated to $300k. Advisor requests $250k loss harvest → truncated to $180k.3. Apply IRS Capital-Gains Netting Sequence
Harvested amounts are combined with any other capital gains/losses in the year and netted per IRS rules: short-term gains vs. short-term losses → net ST; long-term gains vs. long-term losses → net LT; net ST loss offsets net LT gain; net LT loss offsets net ST gain. Remaining net losses deduct up to $3,000 against ordinary income, with the excess carried forward.
Net Capital Gain/Loss = (ST Gains − ST Losses) + (LT Gains − LT Losses), with cross-offset per IRS rules Ordinary Loss Deduction = min(Net Loss, $3,000) Carryforward = max(0, Net Loss − $3,000)
Example: $50k LT gain + $30k LT harvested loss = $20k net LT gain (taxed at LTCG rates). $5k LT gain + $15k LT loss = $10k net loss → $3k deducted from ordinary income, $7k carried forward to next year.4. Adjust Account Basis Post-Harvest
Harvest transactions change account basis but do NOT change account market value (no cash leaves the account). Gain harvesting increases basis (sold low-basis shares, repurchased at market value — higher basis going forward). Loss harvesting decreases basis (sold high-basis shares at lower market prices). Basis is capped at 100% of account value and cannot go below zero.
Post-Harvest Basis = min(Prior Basis + Harvested Gain, Account Value) Post-Harvest Basis = max(Prior Basis − |Harvested Loss|, 0)
Example: Account $300k value, $180k basis (60% ratio). Harvest $50k LT gain → new basis $230k (77% ratio). Future withdrawals now have a larger tax-free return-of-basis portion.5. Flow Through to Capital Gains Tax
The net capital gain (or the residual gain after loss offsets) is taxed at the applicable long-term or short-term rate. Long-term rates depend on the client's taxable income bracket (0% / 15% / 20%) plus the 3.8% NIIT surcharge if MAGI exceeds the applicable threshold. Short-term gains are taxed at ordinary income rates.
Example: MFJ client, $60k ordinary taxable income, harvests $30k LT gain. Total taxable income = $90k — still under $94,050 (2024 MFJ 0% LTCG ceiling). Tax on the harvested gain: $0.
Real-world context
Gain Harvesting in the 0% LTCG Bracket
The 0% long-term capital gains rate applies when total taxable income (including the harvested gain) is below $94,050 MFJ / $47,025 Single in 2024 ($96,700 MFJ / $48,350 Single in 2025). Retirees in the gap between retirement and Social Security or RMDs are frequently in this zone. Harvesting gains to fill this bracket costs zero federal tax and increases the basis ratio, reducing tax drag on future withdrawals. This is one of the most under-used planning moves for early retirees.
IRS reference: IRC §1(h) — LTCG rate tables; Publication 550
Loss Harvesting for Income Offset
Realized capital losses first offset capital gains in the same year (per IRS netting rules). If losses exceed gains, up to $3,000 of net loss can deduct against ordinary income per year (IRC §1211(b)). The excess carries forward indefinitely, preserving short-term vs. long-term character. In years with a large Roth conversion or other ordinary income spike, harvesting available losses can offset a chunk of capital gains income and fund $3,000 of ordinary income deduction on top.
IRS reference: IRC §1211(b); IRC §1212(b)
Wash-Sale Rule — Advisor's Responsibility
IRC §1091 disallows a loss deduction if a 'substantially identical' security is purchased within 30 days before or after the sale. Stratum does not model this rule — the advisor is responsible for ensuring the client's harvest is wash-sale compliant, typically by buying a similar (but not substantially identical) security, waiting 31+ days before repurchasing, or harvesting across asset classes. This is especially important when harvesting in ETFs that track the same index as another ETF the client holds.
IRS reference: IRC §1091; IRS Publication 550
Basis Ratio as a Long-Term Tax Efficiency Lever
Stratum uses basis ratio as the primary driver of future capital gains on withdrawals — a higher basis ratio means more of each future withdrawal is a tax-free return of basis, and only the gain portion is taxed. Gain harvesting is the only way to materially raise the basis ratio on an existing account without contributing new after-tax dollars. Raising basis does not raise the account's gain realization rate — that rate is fixed when the account is entered — so a harvest lowers future withdrawal tax without increasing the gain recognized in later years. This is a long-term tax efficiency play, not just a current-year loss-offset play — for a client who will rely on the taxable account for retirement income over 20+ years, a 20% basis-ratio improvement today compounds into significant lifetime tax savings.
Short-Term vs. Long-Term Harvests
Short-term gains (held ≤1 year) are taxed at ordinary income rates — much higher than long-term rates in most brackets. Short-term losses, conversely, are especially valuable because they offset short-term gains (ordinary rates) before long-term gains. Advisors executing a tax-loss harvest should flag short-term loss positions first if the client also has short-term gains in the year. Stratum's harvest events include a holding period field — set correctly, the netting sequence handles this automatically.
What drives the result
Gain harvests increase the account's basis by the gain amount (capped at account value) and feed into capital gains tax calculation for the year. Loss harvests decrease basis by the loss amount (floored at zero) and reduce net capital gain for the year (with up to $3,000 spilling into ordinary income and the rest carrying forward).
$50k LT gain harvest, $300k account, 60% basis ratio → basis rises to 77%; $50k adds to year's capital gains (taxed at LTCG rate based on total taxable income).
Timing determines which year's bracket and netting the harvest falls into. Gain harvests are most valuable in years with low ordinary income (bracket space to stay in 0% LTCG). Loss harvests are most valuable in years with realized gains to offset.
Harvesting $30k gain in 2027 (low-income retirement year) vs. 2030 (large Roth conversion year): 2027 likely free; 2030 stacks on top of conversion income and may be taxed at 15% LTCG plus NIIT.
Short-term gains taxed at ordinary income rates; long-term at preferential rates (0/15/20% plus NIIT). For loss harvests, the holding period determines the order in the IRS netting sequence and whether the carryforward retains ST or LT character.
$20k loss harvested as short-term: offsets any short-term gains first, then long-term, then ordinary income. $20k loss harvested as long-term: offsets long-term gains first, then short-term, then ordinary income.
Assumptions
- Gain harvest limit: cannot exceed account market value as of the harvest year
- Loss harvest limit: cannot exceed account basis as of the harvest year (losses represent already-taxed dollars being recognized as a decline)
- Harvests change basis but not account market value (no cash movement — the transaction is a notional sell/repurchase for tax purposes)
- Basis capped at 100% of account value; cannot go below 0%
- Capital-gains netting follows the full IRS ordering: ST vs. ST, LT vs. LT, cross-offset, $3,000 ordinary deduction, carryforward
- Carryforward losses are tracked indefinitely and applied automatically in future years, preserving short-term vs. long-term character
Limitations
- Wash-sale rule (IRC §1091) is NOT enforced — advisor manages the 30-day repurchase window with the client at execution time. Stratum assumes any harvested loss is valid for tax purposes.
- Does not model specific-lot identification for harvests — Stratum uses the account's overall basis ratio. (Specific lots can be named on a manual withdrawal rule, but not on a harvest.)
- Does not model state-level capital gains treatment beyond what the state income tax flat rate already captures (no state-specific harvest rules)
- Short-term capital losses and long-term capital losses both carry forward with their original character preserved, but the carryforward is applied in future years before any new-year harvests — advisors cannot choose to 'save' a carryforward for a specific later year
- Gain harvesting in the 0% LTCG bracket still raises AGI (and therefore MAGI), which can trigger NIIT or push the client into an IRMAA tier two years later
Related
This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.