The main ways to reduce capital gains tax

You reduce capital gains tax by controlling when you sell, what you sell, and how you structure the sale. The three most direct routes are tax-loss harvesting (selling losers to offset winners), holding assets longer than one year (to may have access to for lower long-term rates instead of short-term rates), and donating appreciated assets to charity instead of selling them. Each works differently depending on your income, the size of your gain, and your timeline.

The tax rate you pay on gains depends on how long you held the asset and your total taxable income for the year. Long-term gains (held over one year) are taxed at 0%, 15%, or 20% depending on your income bracket. Short-term gains are taxed as ordinary income, which can be much higher. A single filer in 2024, for example, pays 15% on long-term gains if their income is between roughly $47,000 and $518,000, but 37% on short-term gains above $191,950. The difference is substantial.

Key Takeaways

  • Holding an asset for more than one year before selling it usually drops your tax rate from your ordinary income rate to 0%, 15%, or 20%, depending on your total income.
  • Tax-loss harvesting lets you sell investments at a loss to offset gains elsewhere, but you cannot buy the same or substantially identical investment back within 30 days before or after the sale.
  • Donating appreciated stock or real estate to a charity lets you deduct the full current value without paying capital gains tax on the appreciation.
  • Bunching gains and losses into a single year, or spreading them across years, can move you into a lower tax bracket and reduce your overall bill.
  • Inherited assets receive a "step-up in basis," meaning your cost basis resets to the value on the date of death, eliminating tax on gains that occurred before you inherited them.

Tax-loss harvesting: offsetting gains with losses

Tax-loss harvesting means selling an investment at a loss to offset capital gains you have realized elsewhere. If you sold stock A for a $5,000 gain and own stock B that has dropped $3,000 below what you paid, you can sell stock B and use that $3,000 loss to reduce your net gain to $2,000. The tax savings depend on your rate: at 15%, that $3,000 loss saves you $450.

The wash-sale rule is the main trap. If you sell an investment at a loss, you cannot buy that same investment or a substantially identical one within 30 days before the sale or 30 days after it. The IRS will disallow the loss and add it to your cost basis instead. "Substantially identical" is strict: buying the same stock under a different ticker usually does not work, but buying a similar mutual fund in the same sector often does not trigger the rule. If you want to stay invested in the same area, wait 31 days or switch to a genuinely different holding.

Tax-loss harvesting works best when you have realized large gains in a single year—perhaps from selling a business stake, exercising stock options, or liquidating a concentrated position. It is less useful if you have small gains spread across many years, because losses in one year can only offset gains in that year (and carry forward to future years if unused). Losses cannot offset ordinary income except for up to $3,000 per year; anything beyond that carries forward indefinitely.

Timing the sale: one year makes a big difference

If you can wait to sell an asset until you have held it for more than one year, the tax rate usually drops significantly. A gain that would be taxed at 37% as a short-term gain might be taxed at 20% as a long-term gain—a difference of 17 percentage points. On a $100,000 gain, that is $17,000.

The one-year clock starts the day after you buy. If you bought stock on March 15, 2024, you can sell it on March 15, 2025 or later and may have access to for long-term treatment. Selling on March 14, 2025 triggers short-term rates. This matters most when you are close to the anniversary date and considering whether to sell now or wait a few weeks.

Timing also affects which tax year the gain lands in. If you are in a high-income year, you might defer a sale into the next year when your income is lower, moving you into a lower tax bracket. Conversely, if you expect your income to rise next year, selling this year might be cheaper. This trade-off is worth calculating if the gain is large relative to your income.

Donating appreciated assets instead of selling

If you own stock, real estate, or other appreciated assets and want to support a charity, donating the asset itself is almost always cheaper than selling it and donating the proceeds. When you donate appreciated property that you have held for more than one year, you get a tax deduction for the full current fair market value, and you pay zero capital gains tax on the appreciation.

Example: You bought stock for $10,000 and it is now worth $40,000. If you sell it, you owe tax on the $30,000 gain. If you donate it to a may have access to charity, you deduct $40,000 and owe nothing on the gain. The deduction is worth roughly $9,200 at a 23% combined federal and state rate, while the capital gains tax you avoided is worth roughly $4,500 at 15%. You come out ahead by $4,700 compared to selling and donating cash.

The deduction is limited to a percentage of your adjusted gross income—usually 30% for appreciated capital assets, though it can be 50% or 60% depending on the asset type and the charity. Excess deductions carry forward five years. You must donate to a may have access to charitable organization (the IRS website has a searchable list), and you need a written appraisal for property worth over $5,000.

Bunching deductions and gains into a single year

If you are close to a tax bracket boundary, realizing all your gains in one year and deferring others to the next year can keep you in a lower bracket. This is especially useful if you have control over the timing—for instance, if you are selling a business, real estate, or concentrated stock position.

Example: Your ordinary income is $400,000. The 15% long-term capital gains rate ends at $518,900 for a single filer in 2024. You have $150,000 in gains you could realize this year or next. If you realize them this year, they are all taxed at 15%. If you realize them next year when your ordinary income is $450,000, they are still at 15% but you have used up more of your bracket. If your ordinary income next year is $520,000, some of your gains would be taxed at 20%. Selling this year saves you the 20% rate on the overflow.

The reverse also applies: if you expect a lower-income year (retirement, sabbatical, business downturn), you might accelerate gains into that year to use a lower bracket. This requires looking ahead at your income for the next two or three years and doing the math on each scenario.

Using retirement accounts to avoid capital gains tax entirely

Money inside a traditional IRA, 401(k), or Roth IRA grows without triggering capital gains tax each year. You can buy and sell investments inside the account, and no tax is due until you withdraw (or never, in the case of a Roth). This is one of the largest tax advantages available.

If you have high income and cannot contribute to a Roth IRA directly, a backdoor Roth lets you contribute to a traditional IRA and convert it to a Roth, paying tax on the conversion but then growing tax-free forever. If you have a business, a Solo 401(k) or SEP IRA lets you contribute much more than a standard IRA—up to $69,000 in 2024 for a Solo 401(k), compared to $7,000 for a regular IRA.

The catch is that you cannot access the money before age 59½ without penalty (with narrow exceptions). For money you need to use sooner, retirement accounts do not help. But for long-term wealth building, maxing out retirement contributions is the single most powerful way to avoid capital gains tax.

Step-up in basis for inherited assets

When you inherit an asset, your cost basis—the value used to calculate gain or loss when you eventually sell—resets to the fair market value on the date of the person's death. This is called a step-up in basis. If someone bought stock for $10,000 and it was worth $100,000 when they died, your basis is $100,000. If you sell it the next day for $100,000, you have zero gain and zero tax.

This is a one-time benefit and applies to most assets: stocks, bonds, real estate, mutual funds. It does not explore to retirement accounts (IRAs and 401(k)s pass to beneficiaries with their original basis and tax treatment intact) or to assets held in certain trust structures. The step-up is automatic; you do not need to do anything except report the stepped-up value on your tax return when you eventually sell.

This matters most for concentrated positions or real estate that has appreciated significantly. If your parents bought a rental property for $50,000 in 1980 and it is worth $500,000 now, inheriting it and selling it when ready costs you zero capital gains tax. Selling it while they were alive would have cost them tax on $450,000 of gain.

Frequently Asked Questions

Can I use losses from one investment to offset gains from another?

Yes. Capital losses offset capital gains dollar-for-dollar in the same year. If you have $10,000 in gains and $6,000 in losses, your net gain is $4,000. Unused losses carry forward to future years. You can also deduct up to $3,000 of net losses against ordinary income each year; anything beyond that carries forward.

What happens if I sell an asset less than one year after buying it?

The gain is taxed as short-term capital gain, which means it is taxed at your ordinary income tax rate. This can be as high as 37% for high earners, compared to 20% for long-term gains. Waiting just a few weeks to cross the one-year mark can save thousands in tax on a large gain.

Do I have to report the step-up in basis to the IRS?

You report it on your tax return when you sell the inherited asset. You use the stepped-up value as your basis, not the original purchase price. The executor of the estate should provide you with the fair market value on the date of death; if not, you may need to obtain an appraisal.

Can I donate a loss-making investment to charity and deduct the loss?

No. You can only deduct the fair market value of the asset at the time of donation. If you donate stock worth $8,000 that you paid $10,000 for, you deduct $8,000 and get no benefit from the $2,000 loss. You are better off selling the stock first, deducting the loss, and donating the cash proceeds.

What if I sell an asset at a loss and want to buy it back?

You must wait at least 31 days after the sale to buy the same investment back, or the wash-sale rule will disallow your loss. You can buy a similar but not substantially identical investment when ready. For example, you could sell a specific stock and when ready buy a broad index fund, but you cannot sell and when ready rebuy the same stock under a different ticker.