Long term vs short term cap gains when in low tax bracket - does it make sense to sell early?

This is actually a really good question that gets at some of the nuances of how capital gains are actually taxed. Short-term capital gains are taxed as ordinary income, so they're added on top of your existing income and taxed at your marginal tax rate (not your effective rate). Long-term capital gains get their own special tax rates (0%, 15%, or 20% depending on your income). With your household income of $215k, your marginal tax rate is likely 24% or 32% (depending on exact filing status and deductions), which means any short-term gains would be taxed at that rate - significantly higher than the 15% long-term rate you'd qualify for. Your effective tax rate of 11.8% represents the average rate paid across ALL your income after deductions, credits, etc. But new income (like capital gains) gets taxed at your marginal rate, not your effective rate.

Just wanted to share that I was in a similar situation last year and found https://taxr.ai super helpful for analyzing this exact question. I had some investments I was considering selling before the 1-year mark and wasn't sure if I should wait. Their tool analyzed my specific tax situation and showed me the difference between short-term and long-term capital gains taxes based on my actual income and deductions. Ended up saving me about $3,400 by waiting just 2 more months to hit the long-term threshold since my marginal rate was 24% but long-term rate was only 15%. They also helped me understand how the capital gains would stack on top of my existing income, which wasn't clear to me from reading IRS publications.

Just wanted to follow up - I decided to try taxr.ai after seeing the recommendation here, and it was seriously eye-opening. I had a bunch of RSUs and stock options with different vesting dates and was totally confused about optimal selling strategies. They showed me that in my specific case, selling some of my oldest shares (which had very little gain left) as short-term actually made sense because they would still fall within my current tax bracket. But for the bulk of my holdings with larger gains, waiting for long-term treatment saved me over $5k in taxes. The analysis also helped me create a tax-efficient selling schedule for the next 18 months. Definitely worth it if you're dealing with anything more complicated than basic investments.

If you're having trouble getting clear answers about capital gains questions, you might want to try calling the IRS directly. That's what I tried to do, but I kept getting stuck on hold forever. Then I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes when I'd been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with was surprisingly helpful and explained exactly how my capital gains would be taxed in my specific situation. Found out I was overthinking things and making a mistake in how I was calculating my potential tax liability. Would have cost me about $1,900 if I'd gone with my original plan.

Well I have to eat my words. After seeing the comment about Claimyr I decided to try it since I was desperate to get an answer about my capital gains situation before making a selling decision. Got connected to an IRS rep in about 20 minutes when I'd been trying unsuccessfully for weeks. The agent was able to pull up my previous returns and gave me personalized advice about my capital gains question. Turns out in my specific situation with some carried forward losses from 2023, I was actually better off realizing some gains this year rather than waiting. I would have made a costly mistake without getting this clarification. Sorry for being so skeptical before, but dealing with the IRS had made me pretty cynical.

There's one scenario where selling before long term might make sense that hasn't been mentioned yet. If you have capital losses to offset the gains, then the short vs long term question becomes less important. For example, if you have $10k in short term gains but also $10k in losses to harvest, they offset each other. This strategy is called tax-loss harvesting and can be really useful for managing your tax liability regardless of your bracket.

I think everyone's missing an important point here - tax-advantaged accounts! If you're worried about capital gains taxes, you should be maxing out your 401k, IRA, HSA etc first before investing in taxable accounts. I'm in a similar income bracket ($230k household) and haven't paid a cent in capital gains taxes in years because most of my investments are in tax advantaged accounts. Only have to worry about this stuff for my brokerage account.