Strategies to Legally Minimize Your Capital Gains Tax Burden

Most Americans who have invested in assets such as stocks, real estate, or commodities understand that when they cash out, they will be subject to capital gains taxes on their profits. Indeed, one of the most common reasons to put your money into what are known as long-term capital assets is that the top capital gains tax rate is significantly lower than the income tax rate for wealthy investors.

While that can help, the top capital gains tax rate remains 20%, which still cuts into your profits. Fortunately, there are legal ways to significantly reduce, or at least defer, the capital gains tax you owe when you sell assets purchased as investments.

The U.S. taxes capital gains at a lower rate as part of Congress’s efforts to encourage investment in business assets. The lower tax rates also reflect the downside risk of investing in capital assets, as any investment may lose money. This can still yield tax benefits, as investors can use those losses to offset income from other sources.

One final key to minimizing your tax bill on long-term capital gains is remembering that you can choose when to buy and sell assets. Many view their long-term capital asset purchases as “buy and hold” investments they plan to own until they need to sell to fund their retirement, pay for college, or cover another major expense. Being able to choose when to buy or sell your capital asset makes it a flexible investment option, allowing investors to time their purchases or sales for maximum tax benefit.

In this article, we’ll discuss a few strategies you can utilize to legally reduce your capital gains tax burden and where to find help creating a plan tailored to your assets. Let’s start by reviewing capital gains tax calculations and current rates.

What Is Capital Gains Tax?

In general terms, the capital gains tax is a tax on the profits you earn from the sale or other disposition of a capital asset that was held for at least one year. The tax is paid on the gain realized on the sale, not the entire amount received. This is usually the sales price minus the taxpayer’s cost basis in the asset. The cost basis is often your initial investment in the asset, including the purchase price, sales taxes, and commissions.

The profits from the sale of assets held for less than one year, even if they qualify as capital assets, are short-term capital gains and taxed at the ordinary income tax rate. Ordinary income is usually taxed at a higher rate.

Capital assets often include:

• Stocks, including small business stock purchased through a brokerage
• Real estate
• Businesses, even if the taxpayer owns only a portion of the business
• Cars, boats, and other vehicles
• Mutual funds

Retirement accounts, such as 401(k)s or IRAs, are not considered capital assets, and distributions received from them are treated as ordinary income. As a result, you may still pay income tax on an IRA or 401(k) that is invested in capital assets.

Capital gains from selling or otherwise disposing of assets are reported on your annual federal income tax return using Schedule D (Form 1040), Capital Gains and Losses. Form 8949, Sales and Other Dispositions of Capital Assets, is used when more detailed reporting is necessary. The long-term capital gains rates for 2026 are based on the following tax brackets for individuals:

• 0% income up to $49,450 ($98,900 for married filing jointly)
• 15% for income of $49,451 to $545,500 ($98,901 to $613,700 MFJ)
• 20% for incomes over $545,501 ($613,701 MFJ)

Taxes can be complex. If you have questions about long-term capital gains tax rates or other issues, consider speaking with a tax attorney.

Strategies for Reducing Capital Gains Taxes

There is a wide variety of strategies available for reducing your capital gains tax liability. Many high-net-worth investors will hire a tax attorney to help them develop an individualized strategy for their financial situation. The most popular strategies for minimizing the tax on investment gains fall into one or more of the four categories listed below.

Tax-Loss Harvesting

While selling an investment for a loss is often not a desired outcome for investors, the fact that most capital losses are deductible could provide a tax benefit. This is sometimes referred to as tax-loss harvesting. This strategy has the added advantage of allowing a taxpayer to enjoy some benefits while exiting a money-losing investment.

Timing is key for tax-loss harvesting. It involves selling an appreciated capital asset the same year as another is sold for less than the investor’s tax basis. If the profitable and unprofitable assets are sold in the same year, the loss is deductible against the capital gains tax that is owed on the gain from selling the appreciated asset. The losses and gains rarely cancel each other out entirely, but can significantly reduce the tax owed on a profitable asset sale or move the taxpayer into a lower capital gains tax bracket.

In some situations, capital losses can be used as a tax deduction for ordinary income, such as wages from a job or profits from a business. However, the capital losses are first used to offset a taxpayer’s capital gains before they can be used to offset ordinary income. Only $3,000 in capital losses are deductible from ordinary income each tax year, but the losses can be carried forward to offset taxable income in future tax years.

Asset Donations

Capital gains taxes are not collected on assets that are donated to a qualified nonprofit. This means a taxpayer can donate an appreciated asset to charity and enjoy a tax benefit equal to its fair market value, rather than paying capital gains tax on the sale.

For example, if a taxpayer owns stock with a fair market value of $10,000 that they bought for $5,000 and sold it outright, they would have taxable gains of $5,000. However, if that same stock was donated to an eligible charity, the taxpayer would avoid paying capital gains tax on the stock sale and could claim a $10,000 deduction, despite only gaining $5,000 on the transaction.

As with losses, donations of appreciated assets can also offset your ordinary income for up to their market value. The ordinary income tax benefit from the charitable donation of an asset is often limited to 30% of your adjusted gross income, which is income from all sources, minus certain deductions. Losses can be carried forward to future tax years.

1031 Exchanges

Named after Section 1031 of the tax code, these real estate transactions are also known as like-kind exchanges. This exchange allows real estate investors to sell property that has appreciated in value tax-free if they purchase a “like-kind” property within a specified time period. A like-kind exchange can’t be used with your primary residence.

The like-kind requirement has been broadly interpreted by the IRS, allowing exchanges to be used in transactions involving most types of investment real estate. For example, a taxpayer could sell a rental property and roll the profits over into a commercial property.

Like-kind exchanges don’t eliminate the tax on the sale of appreciated real estate, but they allow investors to push their tax obligations into future tax years, where they may have less taxable income. The exchanges also allow investors who sell a property to roll the entire amount they receive from the transaction into the purchase of another property without worrying about withholding capital gains tax.

There are timing rules that must be followed in a 1031 exchange to be recognized by the IRS. The investor must identify the replacement property within 45 days of the initial property sale, and the entire exchange, including closing, must be concluded within 180 days.

Invest in Opportunity Zones

This tax benefit was created in the 2017 Tax Cuts and Jobs Act (TCJA) and made permanent tax law by the One Big Beautiful Bill Act (OBBBA). It allows taxpayers who own appreciated assets to roll their investment over into an opportunity zone fund in a tax-deferred transaction. The fund then buys investment properties in one or more of the country’s nearly 9,000 opportunity zones.

An opportunity zone fund allows the taxpayer to postpone recognition of the capital gains from the sale of the appreciated assets for up to five years. Fund investors also enjoy other tax benefits.

Looking for Additional Guidance?

The processes involved in transactions that yield capital gains tax savings can be complex, and failure to follow the IRS’s rules closely can result in the loss of those benefits. In these situations, consulting an expert in the field is often the best option available.

FindLaw’s directory of qualified tax lawyers is a free resource that can help you find a local attorney experienced in these complex issues. Tax attorneys specialize in tax planning and financial planning to help minimize both your capital gains and income tax bills. They can also assist in preparing tax returns that properly report transactions to the IRS.