With the stock market and crypto prices surging in recent years, many investors are sitting on significant unrealized gains. While this is a great problem to have, it also presents a challenge: how do you unlock these gains without being hit by a massive capital gains tax bill? The good news is there are several tax planning strategies to help mitigate this burden. Here are the most effective ones to consider:
1. Sell Slowly Across Multiple Tax Years
Instead of selling your entire position in one year, sell a portion of your investment each year to avoid being pushed into a higher tax bracket. This strategy allows you to:
- Spread gains across multiple years.
- Potentially keep some or all gains taxed at a lower long-term capital gains rate.
Example: If you’re sitting on $300,000 in gains, you could sell $100,000 annually over three years to stay within the 15% long-term capital gains bracket instead of triggering the 20% bracket by selling all at once.
2. Offset Gains with Loss Harvesting
If you also hold investments with losses, selling those at the same time can help offset your gains and reduce your tax liability. Known as tax-loss harvesting, this strategy minimizes the taxable portion of your gains.
Example: If you sell stock with $50,000 in gains but also sell a crypto position with a $20,000 loss, you’ll only pay tax on the $30,000 net gain.
3. Sell in Lower-Income Years
If you anticipate a lower income year (e.g., between jobs, early retirement, or scaling back work), that’s a prime time to sell appreciated assets. Your long-term capital gains rate could be as low as 0% if your total taxable income falls below certain thresholds.
Example: If you’re transitioning careers and your annual income drops below $89,250 (for a married couple in 2024), your long-term gains may be taxed at 0%, giving you a perfect window to sell tax-efficiently.
4. Utilize Qualified Opportunity Zones (QOZs)
If you’re looking to defer or even eliminate capital gains taxes, a Qualified Opportunity Zone fund could be a compelling option. By investing gains in a QOZ, you can:
- Defer paying taxes on the original gains until 2026.
- Eliminate taxes on any new appreciation if you hold the QOZ investment for 10+ years.
Example: You sell a $100,000 position in crypto, invest the proceeds in a QOZ fund, and hold it for 10 years. The $100,000 gains are deferred, and any new appreciation from the QOZ investment is tax-free.
5. Donate Appreciated Assets to Charity
Donating highly appreciated assets directly to a qualified charity is a win-win:
- You get a tax deduction for the full fair market value of the donation.
- You avoid paying capital gains taxes on the appreciated amount.
Example: You own $50,000 worth of stock purchased for $10,000. By donating the shares, you avoid paying tax on the $40,000 gain and receive a charitable deduction for the $50,000 value.
6. Transfer Stock to an Exchange Fund
An exchange fund pools together stocks from multiple investors, allowing you to diversify your holdings without triggering a taxable event. This can be useful for concentrated single-stock positions.
Example: You hold $500,000 in one tech stock. By transferring the shares into an exchange fund, you receive a diversified portfolio of investments without selling and paying taxes on the original stock.
7. Gifting to Family Members
You can gift appreciated assets to family members in lower tax brackets. They can sell the assets at their lower long-term capital gains rate, potentially paying little to no tax on the sale.
Example: If you gift $17,000 (per individual, tax-free in 2024) in stock to your adult child who’s in college and has no other income, they might pay 0% on the gains when selling.
8. Roth Conversions and Gains
If you’re already planning a Roth IRA conversion, consider selling gains in the same year. By stacking these actions, you can take advantage of your lower tax bracket while converting traditional IRA funds to tax-free Roth dollars.
9. Wait for a Step-Up in Basis
If you’re nearing retirement or don’t need the gains immediately, holding assets until they’re passed on to heirs may result in a step-up in basis, eliminating the capital gains tax altogether.
Example: You own a $1 million property with a $200,000 cost basis. Upon your passing, the property’s cost basis is stepped up to its fair market value, meaning your heirs can sell it without incurring capital gains tax on the $800,000 appreciation.
Final Thoughts
Navigating capital gains taxes can feel overwhelming, especially when markets are on the rise. By combining these strategies, you can significantly reduce your tax burden while maintaining long-term financial flexibility. Keep in mind that tax laws are complex and subject to change, so it’s wise to consult a financial advisor or tax professional before making major decisions.
If you’ve experienced large investment gains recently, take action now to develop a tax-efficient plan—it could save you thousands and keep more of your hard-earned money working for you.
Joseph Stabile is a Registered Representative of and offer securities and investment advisory services through MML Investors Services, LLC. Member SIPC. Supervisory Office: 2 Bala Plaza, Ste 901, Bala Cynwyd, PA 19004. Tel: 610.766.3000
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