Tax-Saving Strategies for Capital Gains Tax
Key Strategies for Reducing Capital Gains Taxes on Investments
It’s a good idea to revisit your tax strategies with an eye toward ensuring you’re taking any and all actions needed to reduce your tax bill. One area to look at is capital gains. While rising investment values are positive, remember that selling those investments can trigger taxable events. The amount of tax you owe on these gains can vary depending on the specific type of asset you’re selling. For example, the tax rules and holding periods for stocks may differ from those for real estate. However, with careful planning, you can potentially reduce your capital gains tax liability and avoid unexpected tax bills.
Holding Periods and Tax Rates
Realized capital gains on assets held in taxable accounts will be taxed at either the short- or long-term capital gains rate, depending on how long you owned the assets before you sold them. If you held an investment for one year or less, your gains will be taxed at the short-term rate, which is your marginal income tax rate. For the 2025 (and 2024) tax years, these rates range from 10% to 37%.
Capital gains on assets held longer than one year are taxed at the long-term capital gains rate. Generally, investors whose annual income puts them in the 10% or 12% ordinary-income tax bracket are subject to the 0% long-term capital gains rate — up until the point where capital gains “fill up” the gap between their taxable income and the top of the 0% bracket. [See IRS Publication 550: Investment Income and Expenses for more information on capital gains tax rates.]
Investors whose income puts them in the middle federal tax brackets for ordinary income generally pay the 15% long-term gains rate. But beware that the top 20% long-term gains rate kicks in before the top ordinary-income rate of 37% does. Keep in mind that you also may be subject to the net investment income tax (NIIT), as discussed later.
“By understanding holding periods, utilizing tax loss harvesting, and navigating the Net Investment Income Tax, you can significantly reduce your capital gains tax liability.”
Four Strategies
If capital gains tax is a concern for you, here are some ways to reduce your potential liability:
1. Monitor your holding periods
Given the fact that short-term gains are taxed more heavily than long-term gains, the first step in managing your tax liability is to pay close attention to your holding periods. Before you sell a security, check to see if you’re close to the point of qualifying for long-term status. If so, it may make sense to delay the sale.
2. Harvest tax losses
You can use capital losses to offset capital gains as well as ordinary earned income. For example, if you incurred a long-term capital gain of $5,000 and a long-term capital loss of $9,000, your net would be a long-term loss of $4,000. You can apply up to $3,000 of this loss each year against your ordinary income, which reduces your income tax liability. The remaining $1,000 can be carried forward to offset future capital gains and/or income. Be aware of any wash sale implications, however.
A wash sale occurs when you sell a security at a loss and then repurchase a substantially identical security within 30 days before or after the sale. This rule prevents investors from claiming a tax deduction for the loss if they essentially maintain the same investment position.
For example: If you sell shares of XYZ Corporation at a loss and then purchase shares of XYZ Corporation within 30 days, the loss from the initial sale is typically disallowed for tax purposes.
3. Use caution with year-end fund purchases
Many mutual funds distribute annual capital gains (and dividends) in December. Shareholders are taxed on these distributions, so you can reduce your tax exposure by waiting until after the capital gains and dividends have been distributed to invest in a fund.
4. Watch out for the NIIT
Taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) are subject to this extra 3.8% tax on the lesser of their net investment income or the amount by which their MAGI exceeds the applicable threshold.
Many strategies that help save or defer income tax on investments can also help avoid or defer Net Investment Income Tax (NIIT) liability. For example, utilizing unrealized losses to offset gains can benefit both income tax and NIIT. Since the NIIT threshold is based on Modified Adjusted Gross Income (MAGI), strategies that reduce MAGI, such as contributing to retirement plans, can also effectively lower or eliminate NIIT liability.
Timing Isn’t Everything
Timing your investment purchases and sales to reduce your capital gains tax, though important, is merely one aspect of what should be a multifaceted and wide-ranging strategy.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.
Questions?
Nick is a CPA with over 15 years of experience specializing in tax compliance, planning, and structuring for small, privately held businesses across industries such as auto dealerships, real estate, construction, and manufacturing. His accessible, responsive approach and proactive advice helps build client trust and satisfaction.