Why We Proactively Manage Capital Gains
Most people think of tax planning as avoiding taxes. Our philosophy is different — we think about managing the timing and amount of taxes you pay over your lifetime, not just this year.
Tax-Deferred Is Not Tax-Free
Growth in a taxable account will eventually be recognized as income. The only question is when — and whether you’re in control of that timing.
Example: You bought a stock fund years ago for $50,000. It’s now worth $120,000. That $70,000 gain exists whether you sell or not. If you sell in a year when your income is low, you might pay 15% — $10,500. If you’re forced to sell in a high-income year, the rate could be higher. The gain doesn’t disappear by waiting; it just becomes harder to predict.
Spreading Gains Over Time Is Usually Smarter
The tax code rewards patience and planning. Recognizing gains gradually — in lower-income years — often costs far less than recognizing a large gain all at once.
Example: You have $100,000 in unrealized gains. Recognizing $20,000 per year over five years at 15% costs $15,000 total. Recognizing the full $100,000 in one year could push you into a higher bracket, costing $20,000 or more — for the exact same investment outcome.
Rebalancing Is Necessary — We Make It Intentional
Over time, a portfolio naturally drifts as some investments grow faster than others. Rebalancing it back to your target requires selling — and selling creates gains. We can’t avoid that. But we can plan for it.
Example: Your target allocation is 60% stocks and 40% bonds. After a strong market year, your portfolio has drifted to 72% stocks. To rebalance, we need to sell some stock funds. Rather than doing this reactively, we plan for it within your annual budget so the tax cost is expected — not a surprise.
We Prioritize Long-Term Gains — But We’re Realistic
Whenever possible, we wait until an investment has been held for more than one year before selling, so any gain qualifies for the lower long-term rate. Short-term gains — taxed at your full ordinary income rate — are something we actively try to avoid.
That said, markets don’t always cooperate with the calendar. Occasionally, rebalancing needs or other portfolio considerations mean a short-term gain is unavoidable. When that happens, we’ll be transparent about it and make sure it’s accounted for in your Tax Plan.
Example: We purchase a fund in August and your portfolio has drifted significantly by the following February — only six months later. Waiting until August to rebalance might mean taking on more risk than is appropriate. In that case, we may choose to rebalance and accept a short-term gain, rather than leave your portfolio out of balance for another six months.
We Establish a Capital Gains Budget With You Each Year
Every spring, we prepare a Tax Plan that sets a target for how much in capital gains we expect to recognize. When we trade your account, we work within that budget — so you always know roughly what to expect before tax season arrives.
