Capital gains (noun): The profits from your investments when you sell them for more than you paid. 

For tech high-earners, capital gains matter profoundly due to three primary reasons:

1. Liquidity Events: An IPO or company sale could result in significant capital gains, which, if not managed properly, can lead to a hefty tax bill. Properly planning for these life-changing financial moments can ensure you keep more of what you’ve earned.
2. Growth-oriented Investment Portfolios: We tend to invest where we’re familiar– for instance, tech professionals may likely invest in other tech companies, which tend to be growth-oriented rather than slow-growing dividend stocks. 
3. Higher-income: With high income comes higher tax rates, particularly for short-term capital gains tax. 

Capital gains tax is influenced by your total income and two key factors:

1. Cost Basis: This is the initial amount you invested, adjusted for extra costs such as broker's fees or commissions. It serves as the benchmark for calculating your gains or losses. Monitor this number in your brokerage account, noting that it can fluctuate over time due to factors like reinvested dividends or wash sales.
2. Holding Period: The duration for which you hold an asset influences whether your gains are categorized as short-term or long-term, each attracting different tax rates. 

Short-term gains, from assets held for a year or less, are taxed at your federal income tax rate, which can range from 0% to 37%. These gains may also be subject to state and local taxes.

Long-term gains aren't taxed at your federal income tax rate but are taxed at more favorable rates, tiered based on taxable income, ranging from 0% to 20%. 

High-income individuals may also face an additional 3.8% net investment income tax on these gains.

Capital Gains and Tax Loss Harvesting

Let’s say you sell $5,000 of TSLA stock and buy back your $5,000 of TSLA in 31 days. 

The new price you buy it at will be considered your cost basis, meaning that you will owe more capital gains tax on TSLA should it increase in the future than you would have had you just held the original shares. 

Here are two scenarios of tax harvesting and establishing a new cost basis at work. 

Scenario A: Didn’t Loss Harvest

You bought $10,000 of TSLA at $400 in November 2021. It’s worth $200 in March 2024, and your position is worth $5,000. 

You’re sitting on a $5,000 unrealized loss. 

You don’t sell anything. No tax loss harvesting. 

TSLA goes up to $800 in 2026. Your position is worth $20,000. You’re sitting on a $10,000 unrealized capital gain. You sell everything. 

Your capital gain is $10,000, and since you held it for over a year, you pay long-term capital gains tax (let’s assume the max, 20%). 

You pay $2,000 in tax.

Scenario B: Loss Harvested

You bought $10,000 of TSLA at $400 in November 2021. It’s worth $200 in March 2024, and your position is worth $5,000. 

You’re sitting on a $5,000 unrealized loss. You decide to sell it all in an attempt to loss harvest. 

You buy $5,000 TSLA back 31 days after the sale at the same price (it didn’t move hypothetically) at $200 a share, your new cost basis.

TSLA goes up to $800 in 2026. Your position is worth $20,000. Since your new cost basis is $200 a share ($5,000 total), you’re sitting on a $15,000 unrealized capital gain. You sell it all.

Your capital gain is $15,000, and since you held it for over a year, you pay long-term capital gains tax (let’s assume the max, 20%). 

You pay $3,000 in tax.

A vs. B: Which is better?

Again, each situation is nuanced and depends on your goals. 

After loss harvesting in Scenario B, you’d pay $1,000 more in tax on the stock. However, you’d also have $5,000 in losses to offset capital gains and ordinary income. 

Suppose your ordinary income is taxed at 30% ($3,000 limit) and capital gains at 20% (remaining $2,000).

You’d save $900 + $400 in taxes, for a total of $1,300. 

So, while tax loss harvesting can be a potent tool in your financial toolkit, navigating its rules requires a bit of finesse and planning.