Making money with your investments is a great feeling. The only downside is the capital gains tax you have to pay on your income when you sell.
Each year, capital gains tax brackets adjust slightly to account for inflation, but they can still deduct some of your profits. By 2025, “single filers can have $48,350 in taxable income or $96,700 for married couples filing jointly and still pay 0% capital gains tax,” according to CNBC. But for single filers making $48,351 to $533,400 ($96,701 to $600,050 for married people filing jointly), a 15% capital gains tax applies. Those who are single filers and earn $533,401 or more ($600,051 or more for those who are married and filing jointly) pay a 20% tax.
The good news for those still caught in the bracket of where capital gains taxes apply? There are three steps you can take to minimize the amount you pay.
Subscribe The Week
Escape your echo chamber. Discover the facts behind the news, plus analysis from multiple perspectives.
SUBSCRIBE & SAVE
Sign up for the free newsletters of the week
From our morning news briefing to a weekly Good News newsletter, get the best of the week straight to your inbox.
From our morning news briefing to a weekly Good News newsletter, get the best of the week straight to your inbox.
1. Use your losses to offset your gains
A “proven way to minimize capital gains taxes is through tax loss harvesting,” meaning “sell a sharebond or mutual fund at a loss, and then use that loss to offset a gain on another position in your portfolio,” he said Kiplinger.
Here’s an example of how that works in practice: “Suppose you own two stocks, one of which is worth 10% more than you paid for it, while the other is worth 5% less. If you were to sell both stocks , the loss on one would reduce the capital gains tax you would owe on the other,” he said Investopedia.
If you’re in an investing scenario where “your capital losses exceed your capital gains, you can use up to $3,000 of it to offset ordinary income for the year,” according to Investopedia, and then “you can carry the loss forward to future tax years until it is exhausted.”
2. Take advantage of tax-advantaged accounts
If you have access to tax-advantaged investment accounts – consider 401(k) plans, IRAs, 529 plans and HSAs — and then “being thoughtful and intentional about the accounts you save in and the investment selections within each type of account can help lower your tax burden,” according to NerdWallet.
For example, you can “use tax-advantaged accounts for more actively traded positions or less tax-efficient investments” and then “direct your buy-and-hold investments or more tax-efficient investments into taxable brokerage accounts,” according to NerdWallet. Retirement accounts in particular allow you to “buy and sell stocks, bonds and other assets without incurring capital gains taxes,” according to SmartAsset.
Your contributions to tax-advantaged accounts can also serve as a way to reduce your taxable income. Since the determining threshold for capital gains taxes is “total taxable income, which is adjusted gross income minus deductions,” as opposed to your salary, said Bank rateare you “able to contribute to a retirement account – a 401(k) or IRA, for example – and reduce your taxable income, make other adjustments, and then subtract your deductions before arriving at taxable income.
3. Aim to hold on to investments for the long term
Another key to minimizing the amount you pay in capital gains taxes is investing for the long term. When you “sell positions that are at least a year old,” you pay “the more favorable long-term capital gains tax rates rather than the short-term capital gains tax rates,” according to NerdWallet.
While long-term capital gains are taxed at the rates mentioned above – 0%, 10% or 15% – short-term capital gains are taxed as ordinary income and could go up to 37% in 2024, depending on your tax bracket. ,” said Investopedia.
This underlines why keeping an eye on your retention periods can be so important. “If you are selling a security you bought about a year ago, make sure you know the transaction date of the purchase,” according to Investopedia, as “a few days or weeks of waiting to qualify for long-term capital gains treatment could be a problem.” a wise move as long as the price of the investment remains relatively stable.”