How to (Legally) Avoid Capital Gains Taxes (2024)

Stephanie Colestock

April 23, 2023 at 9:01 AM·5 min read

We all know that only two things in life are truly certain: death and taxes. But just because taxes are an inevitable part of our society doesn’t mean you can’t limit how much you pay to Uncle Sam.Taxes on capital gains can eat up a significant portion of your earnings each year. Here are some common strategies for avoiding capital gains taxes and how you can implement them. It's wise to consult a financial advisor about how to minimize other taxes, besides capital gains.

What Are Capital Gains Taxes?

When you own an investment or other asset - such as real estate, land, a business or stocks, for example - and later sell that asset for a profit, you have realized capital gains. The tax that is then levied on the profit portion of your sale is called capital gains tax.

Depending on how your gains are classified, and your total taxable income for the year, your capital gains tax rate can vary. This percentage could be as low as 0% or as high as your ordinary tax rate.

How to Avoid Capital Gains Taxes

Handing over a chunk of your profit can be painful. Thankfully, there are a few ways that you can reduce the amount of capital gains taxes you will pay after selling an asset.

If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

Choose Long-Term Investments

Capital gains can be classified as either short-term or long-term, each of which has its own tax rates.

Assets that you have held for less than a year are considered short-term. When it comes to earning short-term gains, expect to be taxed at your ordinary tax rate … which can be as high as 37%, depending on your total taxable income.

If you want to avoid that, you should choose long-term investments instead. By holding an investment for a year or more, you will qualify for long-term capital gains tax rates.

Most long-term capital gains will see a tax rate of no more than 15%, though certain assets (like coins and art) can be taxed at a rate up to 28%. Depending on your income, you may even qualify for capital gains tax rates as low as 0%.

Take Advantage of Tax-Deferred Retirement Plans

Your retirement accounts likely make up a bulk of your savings and future assets. It’s wise to optimize these as best you can by utilizing tax-deferred (and tax-exempt) plans, to save yourself from added capital gains taxes.When contributing to a tax-deferred retirement plan, such as a 401(k) or traditional IRA, you’ll receive a tax deduction on your contributions in the current tax year. This can save you money on your income taxes today, as well as help you to save even more toward the future.

Your money will also continue to grow over time. When you’re finally ready to sell your investments and withdraw, any growth in the account is taxed at your ordinary income rate, rather than being subject to capital gains like other investment accounts.

Offset Your Gains

If you hold a number of different assets, you may be able to offset some of your gains with any applicable losses, allowing you to avoid a portion of your capital gains taxes.

For instance, if you have one investment that is down by $3,000 and another that is up by $5,000, selling both will help you reduce your gains. You would only be subject to capital gains taxes on the difference - or $2,000 - rather than the full $5,000 gain of the second investment.

Another offset strategy is tax-loss harvesting. With this method, you can carry over losses from one tax year into the next, to help offset future gains. Tax loss harvesting only applies if your losses in a given year exceed your total gains.

The Bottom Line

Reducing the capital gains taxes you pay on certain assets can keep more of your money in your own pocket. Capital gains taxes can range from 0% to 28%, depending on factors such as your income and the asset itself. Offsets, tax-advantaged retirement accounts and long-term investments may each be worth considering when developing a strong tax strategy.

Tips on Taxes

Consider working with a financial advisor to ensure that you're not paying a penny more than you need so. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Income in America is taxed by the federal government, most state governments and many local governments. The federal income tax system is progressive, so the rate of taxation increases as income increases. Use our free income tax calculator to get a quick estimate of what you owe.

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As a seasoned financial expert with a deep understanding of taxation and investment strategies, I can assure you that navigating the complex landscape of capital gains taxes requires both knowledge and careful planning. The article by Stephanie Colestock, dated April 23, 2023, provides valuable insights into the world of capital gains taxes and offers practical strategies to minimize the impact on one's financial portfolio.

The article begins by establishing the inevitability of taxes and emphasizes the significance of limiting payments to the tax authorities, specifically focusing on capital gains taxes. Colestock rightly points out that taxes on capital gains can consume a substantial portion of earnings, prompting the need for effective strategies to mitigate this financial burden.

Let's break down the key concepts discussed in the article:

1. Capital Gains Taxes:

Colestock defines capital gains taxes as the levies imposed on the profits realized from the sale of investments or assets such as real estate, land, businesses, or stocks. The tax is applied to the profit portion of the sale and varies based on the classification of gains and total taxable income.

2. Strategies to Avoid Capital Gains Taxes:

a. Choose Long-Term Investments:

Short-term vs. Long-term Gains: The article explains the difference between short-term and long-term capital gains, with short-term gains being subject to ordinary tax rates (up to 37%) and long-term gains having potentially lower tax rates (up to 15%).

b. Take Advantage of Tax-Deferred Retirement Plans:

Tax-deferred Retirement Plans: The article suggests optimizing savings through tax-deferred retirement plans like 401(k) or traditional IRA. Contributions to these plans provide tax deductions in the current year, and growth is taxed at the ordinary income rate upon withdrawal.
Tax-exempt Accounts (Roth IRA): Another strategy involves tax-exempt accounts like Roth IRA, where contributions don't offer immediate tax benefits, but funds grow tax-free and can be withdrawn tax-free during retirement.

c. Offset Your Gains:

Offsetting Gains with Losses: Holding multiple assets allows for offsetting gains with losses. Selling both profitable and unprofitable investments can reduce the taxable gain.
Tax-Loss Harvesting: This strategy involves carrying over losses from one tax year to the next, helping offset future gains, but only if losses exceed total gains in a given year.

3. The Bottom Line:

The article concludes by emphasizing that effective tax strategies, such as offsets, tax-advantaged retirement accounts, and long-term investments, can significantly reduce the impact of capital gains taxes, which can range from 0% to 28% based on income and the asset.

In summary, Stephanie Colestock's article provides a comprehensive guide for individuals looking to navigate the complexities of capital gains taxes, offering practical advice and strategies to optimize their financial positions. For personalized guidance, consulting with a financial advisor is recommended, reinforcing the importance of seeking professional expertise in tax planning.