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We always say in our office: it’s not what you make, it’s what you get to keep. And nowhere is this more true than when it comes to capital gains taxes on your investments.
You’ve worked hard to build your portfolio. You’ve been disciplined about saving and investing. Your accounts have grown over the years. But when it comes time to access that money, whether you’re retiring, making a large purchase, or rebalancing your investments, Uncle Sam wants his cut. And depending on how you handle it, that cut can be significantly larger or smaller.
Capital gains tax applies to the profit you make when you sell an investment that has increased in value. If you bought stock for $10,000 and sold it for $15,000, you have a $5,000 capital gain—and you’ll owe taxes on that profit. This applies to your taxable investment accounts (sometimes called non-qualified accounts), the ones that aren’t IRAs, 401(k)s, or other tax-advantaged retirement accounts. Every time you trigger a gain in these accounts, whether by selling a stock holding or even earning interest in a money market account, you’re potentially creating a tax bill.
The good news? There are legitimate strategies to minimize what you pay in capital gains taxes. Some are as simple as timing when you sell. Others involve charitable giving or sophisticated trust structures. The key is understanding your options and implementing the right combination of strategies for your specific situation.
Strategy #1: Pay Taxes Now While Rates Are Historically Low
The Case for “Taxes on Sale”
This might sound counterintuitive at first: voluntarily pay taxes now? But hear us out because when you look at the historical data and the economic realities we’re facing, paying capital gains taxes today might be one of the smartest financial moves you can make.
Here’s why: we are currently living in a period of historically low tax rates. When you look at federal income tax rates over the past century, today’s rates are near all-time lows. The top marginal income tax rate has been as high as 94% (in 1944-45) and remained above 70% for much of the mid-20th century. Even as recently as the 1980s, the top rate was 50%. Today’s top rate of 37% is remarkably low by historical standards, and capital gains rates follow a similar pattern.
A lot of people are considering paying taxes now because, quite frankly, taxes are on sale. Simple math tells us that taxes have to go up. We have rising debt ceilings, massive government stimulus programs we’ve paid for in recent years, expanding entitlement programs, and an aging population requiring more government support. The federal government needs revenue, and tax increases are one of the most likely ways to generate it.
When This Strategy Makes Sense
The strategy of intentionally recognizing capital gains and paying taxes now—even if you don’t need to access the money—makes sense in several situations:
You’re in a low-income year – Maybe you’ve just retired but haven’t started Social Security or RMDs yet. Your taxable income is temporarily low, putting you in a lower tax bracket. Recognizing some capital gains during these years means you pay taxes at today’s low rates rather than waiting until you’re forced to take distributions later at potentially higher rates.
You’re expecting higher income in the future – If you anticipate higher earnings, larger Required Minimum Distributions, or pension income starting in a few years, paying capital gains taxes now while you’re in a lower bracket could save significantly.
You believe tax rates will increase – Given the fiscal challenges facing the country, many financial experts believe tax rates are more likely to go up than down in the coming years. If you share this outlook, locking in today’s rates might make sense.
You want to reset your cost basis – When you sell investments and recognize a gain, then reinvest the proceeds, you establish a new, higher cost basis. This means if you sell again in the future, your taxable gain will be smaller because it’s calculated from the higher purchase price.
Here’s a simple example: Let’s say you have stock worth $100,000 that you originally bought for $50,000. If you sell it today, you’d have a $50,000 capital gain and pay taxes on that amount at current long-term capital gains rates (likely 15% for most people, or $7,500). If you immediately reinvest that money, your new cost basis is $100,000. If the investment grows to $120,000 and you sell in 10 years, you’d only pay taxes on the $20,000 gain, not the entire $70,000 gain from your original purchase.
Yes, you’re paying $7,500 in taxes now. But if tax rates increase significantly over the next decade, or if your personal income puts you in a higher bracket later, you might have paid $15,000 or $20,000 on that same $70,000 gain. You’ve essentially locked in today’s favorable rates.
Strategy #2: Utilize Donor-Advised Funds (DAFs)
How Do Donor-Advised Funds Work
If you’re charitably minded and regularly give to churches, nonprofits, or other causes you care about, a donor-advised fund (DAF) might be one of the most powerful tax planning tools at your disposal. Yet many people have never heard of them.
Here’s how they work: A donor-advised fund is like a charitable investment account. You contribute cash, securities, or other assets to the fund and receive an immediate tax deduction for the full amount (subject to certain limits based on your adjusted gross income). That contribution adds to your itemized deductions, which can significantly reduce your tax bill for the year you make the contribution.
But here’s what makes DAFs so valuable: you don’t have to decide which charities receive the money right away. The funds remain in the account, where they can be invested and potentially grow tax-free. Then, whenever you’re ready, whether that’s a few times this year, next year, or over the next several decades, you can recommend grants from your DAF to qualified charities of your choosing.
Advantages of DAFs
Donor-advised funds offer several compelling benefits that make them particularly attractive for tax-conscious charitable givers:
Immediate tax deduction – The year you contribute to a DAF, you get a tax deduction for the full amount. This is especially valuable if you have a high-income year. Maybe you sold a business, received a bonus, or took a large distribution from retirement accounts. Contributing to a DAF that year helps offset the tax impact.
Multi-year giving strategy from one contribution – Let’s say you normally give $5,000 to charity each year. Instead of giving $5,000 annually and taking a $5,000 deduction each year (which might not even exceed the standard deduction), you could contribute $25,000 to a DAF in one year, take a $25,000 deduction that year, and then distribute $5,000 annually to charities over the next five years. You’ve “bunched” your charitable giving into one tax year to maximize the deduction benefit.
Investment growth opportunities – The funds in your DAF can be invested, meaning your $25,000 contribution might grow to $30,000 or $35,000 over several years. That means even more money ultimately goes to the charities you support—at no additional cost to you.
Simplified record-keeping – Instead of tracking receipts from dozens of different charities throughout the year, you get one consolidated statement from your DAF showing all your contributions and grants. This makes tax filing much simpler.
Ability to donate appreciated securities – If you have stocks or mutual funds that have gained value, you can donate them directly to a DAF. You get a tax deduction for the full market value and avoid paying capital gains tax on the appreciation. It’s a double tax benefit—which we’ll touch on more when we discuss tax loss harvesting.
2026 Tax Law Changes To Donor Advised Funds
Donor-advised funds are going to become even more relevant in the next few years, and here’s why: Based on current legislation, the standard deduction is scheduled to decrease by roughly half starting in 2026 when provisions of the Tax Cuts and Jobs Act expire.
Right now, the standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. Many people take the standard deduction because their itemized deductions (mortgage interest, property taxes, charitable contributions, etc.) don’t exceed these thresholds. This means their charitable giving doesn’t actually reduce their taxes, it just goes toward the standard deduction they would have received anyway.
But when the standard deduction potentially drops in 2026, many more taxpayers will find that itemizing deductions saves them more money than taking the standard deduction. Suddenly, those charitable contributions will have real tax value again, every dollar you give could reduce your taxable income by a dollar.
This is where the “bunching” strategy with DAFs becomes particularly powerful. If you know you’ll be itemizing in the future, contributing a larger amount to a DAF in 2025 or 2026 and then distributing it over several years lets you maximize your deductions during the years when itemizing makes sense, while still supporting your favorite charities consistently over time.
Strategy #3: Tax Loss Harvesting
The Mechanics: What is Tax Loss Harvesting?
Tax loss harvesting is one of those strategies that sounds complicated but is actually quite straightforward, and it can save you significant money on your tax bill.
Here’s the basic concept: Before the end of the year (specifically, before December 31st), you intentionally sell some investments that have lost value. By recognizing those losses, you can deduct them against your capital gains, reducing your overall tax liability. In some cases, you can even deduct losses against your ordinary income.
Let’s say you have a stock that you bought for $15,000, but it’s now worth only $10,000. If you sell it before year-end, you’ve “harvested” a $5,000 capital loss. That loss can be used strategically to offset gains you’ve taken elsewhere in your portfolio—or to reduce your taxable income if you don’t have gains to offset.
The key timing element here is December 31st. Gains and losses are calculated for the calendar year, so if you want to use losses to offset gains for the 2024 tax year, you need to execute those trades before the year ends. This is why many financial advisors review portfolios with clients in November and December to identify potential tax loss harvesting opportunities.
Now, it’s important to understand that we’re not talking about selling good investments just to create a loss. Tax loss harvesting makes the most sense when you’re holding investments that are genuinely underperforming, that no longer fit your strategy, or that you were planning to sell anyway. The tax benefit is just an added bonus for making a sound investment decision.
Deduction Limits: The $3,000 Rule
Here’s where tax loss harvesting gets even more interesting, and where the rules become important to understand.
If your capital losses for the year exceed your capital gains, you can deduct up to $3,000 of those excess losses against your ordinary income per year. This means even if you didn’t have any capital gains to offset, you could still reduce your taxable income by up to $3,000, which saves you money based on your ordinary income tax bracket.
For example, if you’re in the 24% tax bracket, a $3,000 deduction saves you $720 in federal taxes. That’s real money back in your pocket simply by strategically recognizing losses you were already sitting on.
But what happens if your losses exceed $3,000? That’s where the carryforward rules come into play.
Loss Carryforward Rules
One of the most valuable aspects of tax loss harvesting is that losses you can’t use this year don’t disappear, they carry forward to future years indefinitely until you’ve used them all up.
Here’s a practical example from our discussions with clients: Let’s say you had a rough year in the market and you strategically harvested a $10,000 loss. You didn’t have any capital gains to offset that year, so you’re looking at deducting it against ordinary income.
Year 1: You can deduct $3,000 against your ordinary income for the current tax year. This reduces your taxable income and your tax bill.
Remaining loss: You still have $7,000 in unused losses ($10,000 minus the $3,000 you deducted). This $7,000 carries forward to the next year.
Year 2 and beyond: If you don’t have capital gains in Year 2, you can deduct another $3,000 against ordinary income. The remaining $4,000 carries to Year 3, where you could deduct another $3,000 (with $1,000 carrying forward again). You continue this pattern until the entire loss is used up.
Now here’s where it gets even better: If at any point you have capital gains, you can use your carryforward losses to offset those gains dollar-for-dollar, regardless of the $3,000 annual limit on ordinary income deductions.
For instance, let’s say in Year 2 you sell an investment and realize a $15,000 capital gain. You still have $7,000 in carryforward losses from Year 1. You can apply that entire $7,000 against the $15,000 gain, meaning you’d only pay capital gains tax on $8,000 instead of the full $15,000. This is a huge benefit—you’re essentially using past losses to shelter future gains from taxation.
Multi-Year Tax Planning Strategy
This is why tax loss harvesting isn’t just a one-time trick, it’s part of a comprehensive, multi-year tax strategy. By strategically harvesting losses in down years, you’re creating a “tax asset” that can offset gains in future years when your portfolio recovers and you need to rebalance or take distributions.
Smart investors and their advisors look at tax loss harvesting as part of an ongoing process. Each year, they review the portfolio to identify:
- Underperforming investments that should be sold anyway
- Positions with unrealized losses that could be harvested
- Gains that need to be offset to minimize taxes
- Carryforward losses from previous years that can be deployed
The result is a tax-efficient portfolio strategy that keeps more money working for you instead of going to the IRS. And remember, you’re not losing $10,000 in our example, you’re simply recognizing a loss that already existed on paper, using it to your tax advantage, and potentially reinvesting the proceeds in a similar (but not identical) investment to maintain your portfolio allocation.
Strategy #4: Hold Assets for More Than One Year
Long-Term vs. Short-Term Capital Gains
This might be the simplest strategy on our list, but it’s incredibly powerful: just wait. The IRS rewards patience when it comes to investment gains.
Here’s the critical threshold: 366 days. Hold an investment for one year or less, and you’re paying short-term capital gains tax, taxed as ordinary income at rates up to 37%. Hold it for just one day longer (366 days or more), and you’re paying long-term capital gains tax at preferential rates of 0%, 15%, or 20%.
The Tax Difference
Let’s say you have a $10,000 gain and you’re in the 24% tax bracket.
Sell at 364 days (short-term): You pay $2,400 in taxes
Wait 2 more days (long-term): You pay $1,500 in taxes at the 15% rate
That’s $900 saved by simply waiting two days. For doing nothing except being patient.
The 0% Bracket Opportunity
Here’s something many people miss: if your taxable income is below $94,050 (married filing jointly) or $47,025 (single), you could pay 0% federal tax on long-term capital gains. This creates huge planning opportunities for early retirees before RMDs and Social Security start. You might recognize $50,000 in gains and pay zero federal tax, but only if you’ve held the investments for more than a year.
Planning Considerations
Track your purchase dates – Know when you bought each investment. Many people think they’ve held something “about a year” only to discover they’re a few weeks short.
Be strategic about year-end sales – If you’re at day 364 in December, waiting until January could cut your tax bill by a third or more. Unless you have a compelling reason to believe the investment is about to drop significantly, the tax savings usually outweigh the short-term risk.
When to override this rule – Sometimes you should sell before a year: the investment thesis changed, you need the money urgently, or you have losses to offset the gain. But make it a conscious decision, not an accidental oversight.
The bottom line: that 366th day might be the most valuable day in your investment timeline. Make sure you’re tracking holding periods and timing sales to capture long-term capital gains treatment whenever possible.
Strategy #5: Charitable Remainder Trust (CRT)
What Is a Charitable Remainder Trust?
A charitable remainder trust is a sophisticated estate planning tool that works well for people with significant assets and strong charitable intentions. If giving to charity is part of your long-term legacy plan, a CRT can provide substantial tax benefits while you’re alive, generate income for years or decades, and ultimately support causes you care about.
Here’s how it works: You transfer assets (cash, securities, real estate) into an irrevocable trust. You receive an immediate and often substantial tax deduction for the present value of what will eventually go to charity. The trust then pays you (or you and your spouse) income for a specified period, often for the rest of your life. When you pass away, whatever remains in the trust goes to the charities you designated.
Key Benefits of A Charitable Remainder Trust
Immediate tax deduction – You get a significant tax deduction the year you fund the CRT, which can be carried forward for up to five additional years if you can’t use it all at once. For high-income earners or those with large one-time gains, this can dramatically reduce your tax burden.
Lifetime income stream – The trust pays you income for as long as you live (or for a specified number of years). You benefit from the assets during your lifetime while knowing they’ll ultimately support charitable causes.
Remove appreciated assets from your estate – Assets in the CRT are removed from your taxable estate, potentially reducing estate taxes for your heirs.
Avoid capital gains on donated assets – If you fund the CRT with highly appreciated stock or real estate, you avoid paying capital gains tax on the appreciation. The trust can sell the assets tax-free and reinvest the proceeds.
Who Should Consider a CRT?
CRTs aren’t for everyone and they’re best suited for specific situations:
- You have strong charitable giving goals and want to leave a meaningful legacy to specific organizations
- You’re a high-net-worth individual looking to minimize both income and estate taxes
- You have highly appreciated assets (stock, real estate) you’d like to sell without triggering massive capital gains
- You want income during retirement while ensuring assets eventually go to charity
- Estate and legacy planning are priorities
Important Considerations Before Opening a Charitable Remainder Trust
Before establishing a CRT, understand the commitment you’re making:
This must align with your charitable goals – The assets in the trust will ultimately go to charity. If your primary goal is leaving wealth to your children or grandchildren, a CRT isn’t the right tool.
It’s irrevocable – Once you fund the CRT, you can’t change your mind and take the assets back. This is a permanent decision.
Professional setup required – CRTs are complex legal structures that require attorneys, accountants, and financial advisors to establish and manage properly. There are setup costs and ongoing administrative expenses.
The charitable remainder matters – You need to genuinely want the remaining assets to go to charity. If you’re just doing this for the tax deduction and resent that charities will receive the remainder, you’re not a good candidate for this strategy.
Start Keeping More of Your Investment Returns
Capital gains taxes don’t have to drain your investment returns. By using strategies like the one’s talked about above, you can significantly reduce what you pay and keep more of what you’ve earned.
The current low-tax environment won’t last forever. With tax rates near historic lows and major provisions expiring in 2026, now is the time to be proactive about tax planning, not reactive when filing next April.
If you’d like to explore how these strategies apply to your situation, call our office at (847) 499-3454. We’d love to help you build a comprehensive tax plan. Because remember, it’s not what you make, it’s what you get to keep.
