Strategies to consider if you're looking to reduce capital gains taxes

If a person owns investments or regularly sells assets, it's important to understand the potential tax implications.

When one sells a capital asset for a higher price than its original value, the money made on that sale is called a capital gain. And when a person sells an asset for less than its original value, the money lost is known as a capital loss.

The difference between a person's capital gains and their capital losses is their net profit. For example, if a person sold a stock for a $10,000 profit this year and sold another at a $4,000 loss, their net capital gain is $6,000.

Most items people own are considered capital assets. This can include investments such as stocks, bonds, cryptocurrency or real estate, as well as personal and tangible items like cars or boats.

Capital gains taxes are owed on profits made from the sale of assets. How much a person pays depends on what was sold, how long it was owned before selling, a person's taxable income and their filing status. Capital gains can be subject to either short-term or long-term tax rates.

Some exceptions:

• High-earning individuals may also need to account for the net investment income tax, an additional 3.8% tax that can be triggered if their income exceeds a certain limit.
• Long-term capital gains on so-called “collectible assets” can be taxed at a maximum of 28%. This includes items such as coins, precious metals, antiques and fine art. Short-term gains on such assets are taxed at the ordinary income tax rate

Long-term versus short-term tax

Profits from the sale of an asset held for more than a year are subject to long-term capital gains tax. The rates are 0%, 15% or 20%, depending on taxable income and filing status. Most people pay no more than 15%, per the IRS.

Short-term capital gains tax applies to profits from the sale of an asset held for one year or less. Short-term capital gains are treated as regular income and taxed according to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%.

Capital gains taxes apply to assets that are "realized," or sold. This means that the returns on stocks, bonds or other investments purchased through and then held within a brokerage are considered unrealized and not subject to capital gains tax.

But one important caveat is investments that produce dividends. Even if a person hasn't sold a dividend stock or other dividend investment, the income they receive from the dividends may be considered a capital gain.

Assets held within tax-advantaged accounts — such as a 401(k) or an individual retirement account — aren't subject to capital gains taxes while they remain in the account. Instead, you may pay regular income taxes when it comes time to make a qualified withdrawal, depending on what type of account it is.

Capital gains tax rate 2025

The following rates and brackets apply to long-term capital gains on assets sold in 2025, which are reported on taxes filed in 2026.

*Short-term capital gains are taxed as ordinary income, according to federal income tax brackets.

Capital gains tax rate 2026

The following rates and brackets apply to long-term capital gains on assets sold in 2026, which are reported on taxes filed by April 15, 2027, or Oct. 15, 2027, with an extension.

*Short-term capital gains are taxed as ordinary income, according to federal income tax brackets.

How to reduce or avoid capital gains taxes

Hold on

Whenever possible, hold an asset for longer than a year to qualify for the long-term capital gains tax rate because it's significantly lower than the short-term capital gains rate for most assets.

Use tax-advantaged accounts

These include 401(k) plans, IRAs and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means a capital gains tax doesn't have to be paid if a person sells investments within these accounts. Roth IRAs and 529 accounts, in particular, have big tax advantages. If a person follows the account rules, they can withdraw money from those accounts tax-free. With traditional IRAs and 401(k)s, money grows tax-deferred, then your taxes are paid when distributions are taken in retirement.

Rebalance with dividends

Rather than reinvest dividends in the investment that paid them, rebalance by putting the money into underperforming investments. Typically, a person would rebalance by selling securities that are doing well and putting that money into those that are underperforming. Using dividends to invest in underperforming assets allows a person to avoid selling strong performers and thus avoid the capital gains that would come from selling securities.

Look into tax-loss harvesting

The IRS taxes net capital gain, which is simply a person's total long- or short-term capital gains (investments sold for a profit) minus the corresponding long- or short-term total capital losses (investments sold at a loss). The strategic practice of selling off specific assets at a loss to offset gains is called tax-loss harvesting. This strategy has many rules and isn't right for everyone, but it can help reduce taxes by lowering the amount of taxable gains.

If a person's net capital loss exceeds net capital gains, they can also offset ordinary income by up to $3,000, or $1,500 for those married filing separately. Any additional losses can be carried forward to future years to offset capital gains or up to $3,000 of ordinary income per year.

Use the home sales exclusion

If a person sold a house the previous year, they may be able to exclude a portion of the gains from that sale on their taxes. To qualify, a person must have owned their home and used it as your main residence for at least two years in the five-year period before they sell. They also must not have excluded another home from capital gains in the two-year period before the home sale. If a person meets those rules, they can exclude up to $250,000 in gains from a home sale if they're single, or up to $500,000 if they're married filing jointly.

Consider a financial adviser

Working with a financial adviser can help a person know how and when to take advantages of smart tax strategies in ways that are best for their specific financial situation and goals.