What Is a Simple Trick for Avoiding Capital Gains Tax?

A capital gains tax applies to the profit realized from selling an asset that has increased in value. This tax is levied on the difference between the asset’s sale price and its original purchase price, or “basis.” For instance, if an investment was bought for $100 and later sold for $150, the $50 profit is considered a capital gain. This tax is typically incurred only when the asset is sold, meaning unrealized gains on investments still held are not immediately taxable.

Selling After a Specific Timeframe

The duration for which an asset is held significantly influences how capital gains are taxed. Capital gains are categorized as either short-term or long-term, each subject to different tax rates. Short-term capital gains arise from the sale of assets held for one year or less. These gains are typically taxed at an individual’s ordinary income tax rates, which can range from 10% to 37% depending on the taxpayer’s income bracket.

Conversely, long-term capital gains result from the sale of assets held for more than one year. These gains generally benefit from preferential tax rates, which are often lower than ordinary income tax rates. For most individuals, long-term capital gains are taxed at 0%, 15%, or 20%, depending on their overall taxable income. For example, in 2025, a 0% rate applies to lower income thresholds, while the 15% and 20% rates apply to higher income levels.

To qualify for long-term capital gains treatment, the asset must be held for at least one year and one day. For instance, selling a stock after 11 months might result in a 24% tax rate if that is the individual’s ordinary income tax bracket, whereas holding it for 13 months could reduce the tax rate to 15% on the same gain, representing a substantial tax saving.

Offsetting Gains with Investment Losses

Another strategy to manage capital gains tax involves utilizing investment losses through a process known as tax-loss harvesting. This strategy allows investors to use realized capital losses to reduce or eliminate capital gains. When an investor sells an asset for less than its adjusted basis, a capital loss is incurred.

These capital losses can first be used to offset any capital gains realized during the same tax year. Short-term losses are applied against short-term gains, and long-term losses against long-term gains. If there are remaining losses, they can then be used to offset gains of the other type. For example, if short-term losses exceed short-term gains, the excess can be used to offset long-term gains.

If total capital losses exceed total capital gains for the year, taxpayers can use up to $3,000 of the remaining net capital loss to offset ordinary income. For married individuals filing separately, this limit is $1,500. Any net capital loss exceeding this annual limit can be carried forward indefinitely to offset capital gains or a limited amount of ordinary income in future tax years.

The “wash-sale rule” prohibits claiming a loss on the sale of a security if a substantially identical security is purchased within 30 days before or after the sale date, creating a 61-day window. If a wash sale occurs, the disallowed loss is added to the cost basis of the newly acquired security, deferring the tax benefit until the new security is eventually sold.

Excluding Gains from Home Sales

The Internal Revenue Code provides a significant tax exclusion for gains from the sale of a primary residence, specifically under Section 121. This provision allows homeowners to exclude a substantial portion of their capital gain from taxable income. To qualify, individuals must meet both an ownership test and a use test.

The ownership test requires that the taxpayer owned the home for at least two years during the five-year period ending on the date of the sale. Concurrently, the use test mandates that the taxpayer must have lived in the home as their main residence for at least two years during that same five-year period. These two-year periods do not need to be consecutive, meaning periods of occupancy can be aggregated to meet the requirement.

For single taxpayers, up to $250,000 of the gain from the sale of their primary home can be excluded from income. For married couples filing jointly, this exclusion increases to $500,000, provided at least one spouse meets the ownership test and both spouses meet the use test. This exclusion applies only to a principal residence and cannot be used for investment properties, vacation homes, or other real estate. This exclusion can be claimed only once every two years.

Donating Appreciated Property

Donating appreciated non-cash assets to a qualified charity offers a method to avoid capital gains tax while potentially receiving a charitable deduction. This strategy is particularly effective for assets like stocks, mutual funds, or real estate that have been held for more than one year and have significantly increased in value.

By directly donating these long-term appreciated assets to a qualified public charity, the donor typically avoids paying capital gains tax on the appreciation that would have been incurred if the asset were sold first. This means the full market value of the asset benefits the charity without being reduced by capital gains taxes. The charity, as a tax-exempt organization, is generally not subject to capital gains tax when it sells the donated asset.

In addition to avoiding capital gains tax, donors may also be eligible for an income tax deduction for the full fair market value of the donated property. This deduction is subject to certain annual limits, up to 30% of the donor’s adjusted gross income (AGI) for appreciated property. Any excess deduction can be carried forward for up to five subsequent tax years.