Should you harvest capital gains at today's rate?

According to our colleagues in the UBS US Office of Public Policy (click here?for their latest letter),?the fact that?Congress has passed a fiscal year 2022 budget resolution?means that we could be just days away from a higher capital gains tax rate. This new tax rate is likely to be effective before the final bill is passed, and that effective date could be very soon—perhaps as early as the week of 6 September.

If that is the case, it is possible that long-term capital gains realized in the next few days could be subject to a top tax rate of?23.8%?(20% plus 3.8% net investment income tax), while capital gains realized starting in September could face a tax rate of?31.8%?(28% plus 3.8% NIIT).

We do not know if this tax increase will come with a change to the tax brackets, but for reference Fig. 1 summarizes the current long-term capital gains tax brackets for married couples filing jointly.

One important thing to remember is that even if you pay a lower tax rate today, the tax payment you send to the IRS will no longer be growing in your account. To maximize your after-tax wealth, we need to balance the potential tax rate increase against the growth on those tax payment dollars in the years ahead—and that means that the expected growth of your investments and your holding period are both important. Fig. 2 shows the breakeven holding period taking these factors into consideration (for more on this math, please see?part 1?and?part 2?of this series).

If you are planning to realize capital gains in the next 4–10 years, if you don't have carryforward capital losses, and if you don't expect to fall into a lower tax bracket in any tax year during that timeframe, then the answer to our question may be "yes." You should contact your financial advisor and your tax advisor to discuss whether it makes sense to realize some capital gains today.

On the other hand, if you are planning to defer capital gains for longer than 4–10 years, if you have carryforward losses to offset gains, or if you anticipate some years of lower taxable income, then the answer is likely to be "no." Most investors have a long time horizon, especially for their stocks, so we expect that most will be best served by deferring capital gains taxes into the future, even if it means eventually paying a higher tax rate in the future.

For more advice around preparing for potential tax changes, please consider the other steps we describe in "POTUS 46: 8 ways to prepare for higher taxes," and stay tuned for further updates.

Originally authored as a CIO blog by Justin Waring, Investment Strategist Americas, Dan Scansaroli, Head of CIO Portfolio Strategy and UBS Wealth Way Solutions, and Ainsley Carbone, Total Wealth Strategist Americas

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