Taxes apply to just about everything, including stocks and real estate. Capital gains taxes are levied on profits made from the sale of assets, and they’re a commonly misunderstood element of investing. In this post, we’ll break down capital gains taxes and explain how you can limit your financial burden come tax season.

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What is Capital Gains Tax?

Capital gains tax is a tax on the profits earned from the sale of non-inventory assets. The rate varies depending on how long the asset was held before selling.

Short-Term Capital Gains

Short-term assets are those held for less than a year, and they’re taxed as ordinary income. There are several brackets you can fall under: 10%, 12%, 22%, 24%, 32%, 35%, or 37%. Your bracket depends on your earnings and filing status.

Long-Term Capital Gains

If an asset is held for longer than a year, long-term capital gains taxes apply. The 2025 capital gains tax rates for long-term assets are 0%, 15%, and 20%. Like short-term taxes, the bracket you fall under depends on how you file and how much you make. 

For example, single filers making up to $48,350 would fall under the 0% bracket, whereas those married filing jointly making $600,051 or more in asset sales would pay a 20% rate. 

Strategies to Minimize Capital Gains Taxes

If the idea of paying taxes on your assets has you fretting, don’t fear––there are several strategies you can leverage to limit your tax burden.

Utilizing Tax-Advantaged Accounts 

One effective strategy to defer or even avoid capital gains tax is by investing through tax-advantaged accounts, such as an IRA or a 401(k). These accounts allow investments to grow tax-free or tax-deferred, meaning you won’t pay capital gains tax as the investment value increases. The main types of tax-advantaged accounts include: 

  • Employer-Based Retirement Plans: 401(k)s and other employer-sponsored retirement plans do not incur taxes on capital gains until withdrawal. This can be beneficial if you expect to be in a lower tax bracket when you retire.
  • Roth IRAs: Roth IRAs, while funded with post-tax dollars, allow for tax-free growth, meaning all capital gains are free from taxes upon qualified withdrawal after age 59½.
  • Health Savings Accounts (HSAs): HSAs are another type of tax-advantaged account that can help offset capital gains taxes. Their benefits are trifold: they’re tax-deductible, investments grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Though HSAs are primarily designed for healthcare costs, they can be an effective means of growing wealth tax-free.

Opening tax-deferred accounts like these can effectively shield capital gains from taxes and offer a path to tax-efficient wealth growth for future needs.

Offsetting Gains With Losses

No one likes to lose money, but by selling underperforming assets, you can actually offset the gains from profitable ones. This strategy, known as tax-loss harvesting, aims to balance capital losses with capital gains to lower taxes. Say you sell a stock with a $3,000 loss. You can use that to offset a $2,000 gain from another stock, basically eliminating the tax on the gain. The remaining $1,000 loss can further reduce your taxable income up to allowable limits.

Holding Investments for Longer

Holding investments for longer can be a strategic approach to reduce the impact of capital gains taxes. By turning short-term gains into long-term gains, you can limit your tax burden. What’s more, a longer holding period may allow for the growth of compound interest, further boosting the investment’s value. This strategy aligns with a long-term, growth-oriented approach. 

Donating Appreciated Assets to Charities

When you donate appreciated assets directly to a charity, you can avoid paying capital gains taxes on the appreciation, and you may also receive a charitable deduction for the fair market value of the donation, assuming you itemize deductions. 

The Primary Residence Exclusion

The Primary Residence Exclusion allows homeowners to exclude a substantial portion of capital gains from the sale of their primary residence from taxable income––in some cases, even eliminating the tax owed. Filers may exclude up to $250,000 of the gain from their income, or $500,000 if filing jointly with a spouse. 

Know How to Preserve Your Capital Gains

Capital gains come with one major downside, and that’s a higher tax burden. While taxes are an inevitable part of life, especially for those bringing in large amounts of money, you can preserve a substantial portion of your income by leveraging these strategies. Whether you choose to focus on tax-deferred accounts, charitable donations, or otherwise, you can take control of your tax situation and ensure more money ends up in your pocket. That way, you can build wealth and work towards the financial future you deserve. 

 

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