Template: Harvest Long Term Capital Gains

Example: VTI

With abstract ideas such as harvesting capital gains, I find that a real
world example goes a long way towards solidifying the concept in my
brain. The only thing better is actually going through the steps. This
template may help.

1. Determine Long Term Capital Gain harvest amount

Long Term Capital Gains are taxed at 0% as long as total income is still within the 15% Federal
marginal income tax rate. In 2016 for a Married Couple Filing Jointly, this was $96,000. (Gains may
still be taxed at the State level, depending on where you live. Check your State tax regulations.)

By subtracting total taxable income from $96,000, we arrive at a target gain to harvest. In 2016, I
targeted $27,500.

Adjust target gains accordingly if you have additional exemptions or if you itemize deductions.
This is part of my overall ​year-end tax management process​.

2. Choose Specific Shares to sell

In your taxable brokerage account look for the shares with the greatest gain. I seek to raise the
basis in my lowest purchase price shares first.

This snapshot of the VTI shares held in our brokerage account shows we have shares from
7/7/2008 that were purchased at $62.01. Those are my target

.
3. Plan the sale date

I do all of my gain harvesting in December, because that is when I have the clearest understanding
of annual income.

Many Mutual Funds / ETFs have dividend distributions during this time. It is important to know
these dates to ensure you get the dividend (or not.) Whoever owns the shares at market open on
the ​ex-dividend date​ will receive the dividend.

In 2016 I intended to contribute much of the gain to my Roth solo 401k, and I wanted the dividend
to be received in the Roth to reduce 2016 dividend income (as it allowed me to harvest a slightly
larger capital gain.)

In 2016, the VTI ex-dividend date was 12/20. I executed my trades on 12/13.

4. Execute the sale

Execute a ​limit order​ sale with the ​specific shares​ we selected in Step 2.

Limit Order Sale of Specific Shares (Fidelity Brokerage)

On 12/13 I sold 500 shares of VTI for $117.36/share, a gain of $55.35/share.

Expenses were commission of $7.95 and misc fees of $1.29.

Total long-term capital gains were $27,665.76.

Cash proceeds from the sale were ~$58,671.

5. Reinvest the proceeds

Reinvest the proceeds of the sale per your target asset allocation.

Harvesting capital gains is a normal part of rebalancing. Note that there is no wash sale rule when
harvesting gains.

With this sale, I transferred $18,000 of the proceeds to my solo 401k and $11,000 to his/her Roth
IRAs. In the solo 401k and both Roth IRAs I purchased more shares of VTI. By great fortune, I was
able to buy at a slightly lower price than I sold.

With the remaining $29,670, I purchased 542 shares of ITOT at $52.20/share. ITOT is an iShares
ETF similar to VTI (Total US Stock Market) but iShares are commission free at Fidelity and ITOT
has a slightly lower expense ratio (0.03% vs VTI’s 0.05%)

After these purchases, I still had $1,378.36 in cash that will be spent over the coming months. (See
cash flow management​.)

6. Report the gain on IRS Form 1040 Schedule D at tax time

TurboTax​ (affiliate link) imports all of our dividend and capital gain data directly from Fidelity
(and other brokerages), which can be a nice time saver (and ensures accuracy.)

Summary
Before:
Shares: 500 shares of VTI
Valuation: $58,671
Basis: $27,675
Unrealized long-term capital gains: $27,665

After:
Shares: VTI & equivalent (ITOT)
Valuation: $58,671
Basis: $58,671
Unrealized long-term capital gains: $0
Federal Income Tax due: $0

Questions?
If you have any questions or comments on this document, please share in the comments on the
post ​4 Years of Tax-Free Living​.

Thank you.
NOTE: I’m just a random guy on the Internet who has no idea what he is doing. Tax laws
change periodically, and you should consult with a tax professional​ ​for the most
up-to-date advice. The information contained in this template is not intended as tax
advice, is not a substitute for tax advice, and could just be wrong :)