How to Reduce Capital Gains Tax: 9 Strategies to Discuss With Your Advisor
If you have owned stocks, a business, or real estate for a long time, you may be sitting on large unrealized gains. Selling can feel expensive, and holding forever can leave a portfolio concentrated or out of balance. Learning how to reduce capital gains tax is often less about one clever move and more about planning the timing, location, and purpose of each sale.
This guide covers capital gains tax reduction strategies worth discussing with your advisor, from everyday portfolio techniques to larger planning moves for business owners and real estate investors.
Start Here: A Complimentary Wealth and Tax Review
Before selling a large position, it helps to see your full picture: cost basis, holding periods, other income, and what you plan to do with the proceeds. Compound offers a complimentary, no-obligation wealth and tax review that may include:
Unrealized gains and losses: across taxable accounts, real estate, and business interests
Your projected tax picture: this year and next, so sales can be timed thoughtfully
Concentrated positions: single stocks or assets that may deserve a multi-year plan
Charitable and family goals: which may open additional options
Request your wealth and tax review.
How Is Capital Gains Tax Calculated?
A capital gain is the difference between what you receive when you sell an asset and your cost basis. Assets held more than one year generally qualify for long-term capital gains rates, which are typically lower than ordinary income rates. Assets held one year or less are generally taxed as ordinary income. Higher-income taxpayers may also owe a separate net investment income tax, and state taxes, including Wisconsin's, may apply. Because the rate depends on your total income, the same sale can produce a different tax bill in different years.
How to Reduce Capital Gains Tax: Strategies to Discuss
Every situation is different, and no strategy fits everyone. These are among the most common approaches.
1. Harvest Losses
One of the most direct ways to offset capital gains is to sell investments that have declined in value. Realized losses offset realized gains, and excess losses may offset a limited amount of ordinary income each year, with the rest carried forward. Wash sale rules disallow the loss if you buy a substantially identical investment within 30 days before or after the sale, so replacement holdings need care.
2. Mind the Holding Period
Waiting until an asset has been held more than one year can shift a gain from ordinary income treatment to long-term rates. It is a simple step that is easy to miss when rebalancing.
3. Spread Sales Across Tax Years
Selling a large position over two or more years may keep more of the gain in lower brackets. This can work well alongside a plan to diversify a concentrated holding gradually.
4. Use Lower-Income Years
Years with lower income, such as early retirement, a sabbatical, or the year after a business sale, may be a good time to realize gains. These years may also be worth evaluating for Roth conversions, so both decisions should be modeled together.
5. Give Appreciated Assets to Charity
Donating long-held appreciated securities directly to a charity or donor-advised fund may provide a deduction for their fair market value while avoiding tax on the gain. Deduction limits based on income apply. Charitable remainder trusts are another option for larger gifts, coordinated with your estate attorney.
6. Gift to Family Members
Gifting appreciated assets to family members in lower tax brackets may reduce the tax on an eventual sale, though the recipient generally takes your cost basis, and rules for gifts to children can limit the benefit. Gift tax reporting may also apply.
7. Consider the Step-Up in Basis
Assets held until death generally receive a new cost basis equal to their value at that time, which can eliminate the built-in gain for heirs. For older investors, deciding which assets to sell and which to hold is an important part of legacy planning.
8. Defer Gains on Real Estate and Business Sales
A like-kind exchange may defer gain when investment or business real estate is exchanged for similar property. An installment sale can spread gain from a business or property sale across years. Qualified Opportunity Fund investments may offer deferral under rules that have changed recently. For more, see our guide to real estate capital event tax planning.
9. Check for Exclusions
Some gains may be partly or fully excluded. Examples include the home sale exclusion for a primary residence that meets ownership and use tests, and the federal exclusion for certain qualified small business stock in C corporations that meets holding period and other requirements. Business owners can learn more in how to keep more money from the sale.
Taxes Should Not Drive Every Investment Decision
Avoiding a sale only to save tax can leave you with a concentrated or poorly balanced portfolio. Sometimes paying a manageable tax to diversify is the more prudent choice. Good wealth management weighs tax cost against risk, goals, and timeline. Our article on high net worth investment management explains how a portfolio can be built around your full picture, including embedded gains.
Asset location also matters. Holding tax-efficient investments in taxable accounts and less efficient ones in tax-deferred accounts may reduce how much gain and income you realize each year. When tax planning and preparation is coordinated with your portfolio, these choices can be made throughout the year rather than discovered in April.
To see how keeping more of each year's growth may compound over time, try the Compound calculator. Results are hypothetical and for illustration only. Families with multiple generations involved may also benefit from family office wealth management.
Plan Before You Sell
Compound works with investors, business owners, and families throughout Wisconsin, including Milwaukee, Madison, Waukesha, Green Bay, Appleton, Racine, and Eau Claire, as well as surrounding areas. Request a complimentary wealth and tax review before your next large sale.
Frequently Asked Questions
How can I reduce capital gains tax?
When thinking about how to reduce capital gains tax, strategies to discuss include harvesting losses, holding assets more than one year, spreading sales across years, selling in lower-income years, donating appreciated assets, and using exchanges or installment sales for real estate and business sales.
What are the main ways to offset capital gains?
Realized capital losses offset gains. Excess losses may offset a limited amount of ordinary income each year and carry forward to future years.
How to minimise capital gains tax on a large stock position?
Options may include selling gradually over several years, pairing sales with harvested losses, donating some shares to charity, or gifting shares to family. The right mix depends on your income, goals, and timeline.
How to reduce CGT when selling real estate?
Depending on the property, a like-kind exchange, an installment sale, or the primary residence exclusion may be worth discussing. Depreciation recapture also needs to be considered on investment property.
Should I avoid selling to avoid capital gains tax?
Not always. Holding a concentrated position only to avoid tax can increase risk. The decision should weigh taxes alongside diversification and your goals.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against loss. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Compound Wealth is an integrated tax, wealth management, accounting, and business transition firm serving business owners, professionals, real estate investors, and families. Rather than viewing financial decisions independently, the firm takes a coordinated approach that considers how tax planning, wealth management, accounting, and long-term planning often intersect. This planning-first philosophy helps clients evaluate financial decisions within the context of their broader objectives.
