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How to Reduce Capital Gains Tax: 11 Strategies to Consider
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How to Reduce Capital Gains Tax: 11 Strategies to Consider
Managing capital gains tax liability can significantly reduce your tax burden. Here are some ways to get started.
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Expertise Merrill Lynch UBS AG UBS Global Asset Management Credit SuisseTiffany Lam-Balfour is a former investing writer and spokesperson at NerdWallet. Previously, she was a senior financial advisor and sales manager at Merrill Lynch. Her work has been featured in MSN, MarketWatch, Entrepreneur, Nasdaq and Yahoo Finance. Tiffany earned a finance and management degree from The Wharton School of the University of Pennsylvania.
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11 years of experienceChris Hutchison helped build NerdWallet's editorial operation and has directed coverage across banking, investing, taxes and insurance. He now leads a team exploring new verticals. Before joining NerdWallet, he was an editor and programmer at ESPN and an editor at the San Jose Mercury News.
Chris Hutchison helped build NerdWallet's editorial operation and has directed coverage across banking, investing, taxes and insurance. He now leads a team exploring new verticals. Before joining NerdWallet, he was an editor and programmer at ESPN and an editor at the San Jose Mercury News. Head of Content, New Verticals + more + moreBeing proactive about managing your investments can help reduce your capital gains tax bill, which lets you invest and grow more of your money.
Being proactive about managing your investments can help reduce your capital gains tax bill, which lets you invest and grow more of your money.1. If you’re going to buy and sell often, try to do it in a tax-advantaged account
1. If you’re going to buy and sell often, try to do it in a tax-advantaged accountWhen you sell stocks or other investments, the profits can be subject to capital gains tax in the year you sell, unless the investments were in an account that isn’t subject to the regular capital gains tax rules. IRAs, 401(k)s, 529s, HSAs and irrevocable trusts are examples of accounts that provide these tax benefits.
When you sell stocks or other investments, the profits can be subject to capital gains tax in the year you sell, unless the investments were in an account that isn’t subject to the regular capital gains tax rules. IRAs , 401(k)s 401(k)s , 529s 529s , HSAs HSAs and irrevocable trusts irrevocable trusts are examples of accounts that provide these tax benefits.Deciding whether to use an active or passive investing strategy is a key part of investing. To reduce capital gains tax, it can be useful to use tax-advantaged accounts for actively traded positions or less tax-efficient investments and to use taxable brokerage accounts for buy-and-hold investments or more tax-efficient investments.
Deciding whether to use an active or passive investing strategy is a key part of investing. To reduce capital gains tax, it can be useful to use tax-advantaged accounts for actively traded positions or less tax-efficient investments and to use taxable brokerage accounts for buy-and-hold investments or more tax-efficient investments .» MORE: Check out our free capital gains tax calculator
» MORE: » MORE: Check out our free capital gains tax calculator Check out our free capital gains tax calculatorThe more you earn, the more complex your taxes become. Learn the 10 traps to dodge.
GET THE FREE GUIDEon NerdWallet Wealth Partners' site. For informational purposes only. NerdWallet Wealth Partners does not provide tax or legal advice.
on NerdWallet Wealth Partners' site. For informational purposes only. NerdWallet Wealth Partners does not provide tax or legal advice.2. Hold investments for at least a year, if it makes sense
2. Hold investments for at least a year, if it makes senseIf you need to sell an investment, first calculate how long you’ve owned the investment. Capital gains tax rates are generally lower if the seller has owned the investment for more than a year. If the delay makes sense for your portfolio and your cash needs, waiting to sell can reduce capital gains tax.
If you need to sell an investment, first calculate how long you’ve owned the investment. Capital gains tax rates are generally lower if the seller has owned the investment for more than a year. If the delay makes sense for your portfolio and your cash needs, waiting to sell can reduce capital gains tax.» MORE: See the short-term and long-term capital gains tax rates
» » MORE: MORE: See the short-term and long-term capital gains tax rates3. Harvest tax losses
3. Harvest tax lossesIf you’ve sold some investments that have generated taxable capital gains during the year, see if any of your other investment positions are underwater. Selling some of those underwater investments at a loss, assuming you’re willing to part with the investments, could help offset your capital gains, which could lower your tax bill.
If you’ve sold some investments that have generated taxable capital gains during the year, see if any of your other investment positions are underwater. Selling some of those underwater investments at a loss, assuming you’re willing to part with the investments, could help offset your capital gains, which could lower your tax bill.This strategy, called tax-loss harvesting, allows investors to offset up to $3,000 of ordinary income per year
This strategy, called tax-loss harvesting , allows investors to offset up to $3,000 of ordinary income per year IRS.gov. Topic no. 409, Capital gains and losses. Accessed Nov 21, 2025. . However, beware of the wash sale rule and know how to calculate your cost basis so you can stay within the rules. ? Nerdy TipYou might be able to apply this year's leftover capital losses to future tax years, meaning you may be able to use them to reduce future capital gains tax bills. See a financial advisor to ensure you're following the rules.
You might be able to apply this year's leftover capital losses to future tax years, meaning you may be able to use them to reduce future capital gains tax bills. See a financial advisor to ensure you're following the rules.4. Capitalize on lower-income years
4. Capitalize on lower-income yearsAnother way to reduce capital gains tax is to wait until you’re in a lower tax bracket before selling investments that generate big taxable gains.
Another way to reduce capital gains tax is to wait until you’re in a lower tax bracket before selling investments that generate big taxable gains.For example, if you were unemployed for part of the year, or you took a pay cut, retired or just took some time off and thus made less money this year compared to last year, you might be in a lower tax bracket this year. And because short-term capital gains tax rates are the same as the ordinary income tax rates, the profits on investments you sell during the year could be subject to a lower capital gains tax rate this year than they would have been last year when you were in a higher tax bracket.
For example, if you were unemployed for part of the year, or you took a pay cut, retired or just took some time off and thus made less money this year compared to last year, you might be in a lower tax bracket this year. And because short-term capital gains tax rates are the same as the ordinary income tax rates, the profits on investments you sell during the year could be subject to a lower capital gains tax rate this year than they would have been last year when you were in a higher tax bracket.» Need help? See our picks for the year's best wealth advisors
» Need help? » Need help? See our picks for the year's best wealth advisors See our picks for the year's best wealth advisors5. Sell part of the investment rather than the whole thing
5. Sell part of the investment rather than the whole thingTo reduce your capital gains tax bill this year, consider unwinding your position over the course of several years, which stretches out the tax consequences.
To reduce your capital gains tax bill this year, consider unwinding your position over the course of several years, which stretches out the tax consequences.For instance, liquidating one-third of a position at the very end of 2026, one-third during 2027, and one-third in the very beginning of 2028 would take just over a year to accomplish but would allow you to distribute the capital gains taxes across three tax years. However, it’s important to consider this strategy only if it makes sense for your portfolio and other financial goals.
For instance, liquidating one-third of a position at the very end of 2026, one-third during 2027, and one-third in the very beginning of 2028 would take just over a year to accomplish but would allow you to distribute the capital gains taxes across three tax years. However, it’s important to consider this strategy only if it makes sense for your portfolio and other financial goals.» MORE: See how much a financial advisor costs
» MORE: » MORE: See how much a financial advisor costs See how much a financial advisor costs6. Sell in advance of anticipated tax rate increases
6. Sell in advance of anticipated tax rate increasesIf you believe capital gains tax rates will increase in a future year, selling now might make sense if you’d like to avoid the higher tax rate later.
If you believe capital gains tax rates will increase in a future year, selling now might make sense if you’d like to avoid the higher tax rate later.As with all tax strategies, be careful of IRS rules. Selling assets could trigger the 3.8% net investment income tax, alternative minimum tax or other headaches depending upon your financial situation. Be sure to consult a qualified financial advisor to ensure this or any other tax strategy will work for your specific situation.
As with all tax strategies, be careful of IRS rules. Selling assets could trigger the 3.8% net investment income net investment income tax, alternative minimum tax or other headaches depending upon your financial situation. Be sure to consult a qualified financial advisor to ensure this or any other tax strategy will work for your specific situation.» MORE: How to find a CPA or tax accountant near you
» MORE: » MORE: How to find a CPA or tax accountant near you How to find a CPA or tax accountant near you7. Monitor mutual fund distributions
7. Monitor mutual fund distributionsIf you’re a mutual fund investor, you could be subject to capital gains taxes at the end of each year. Mutual funds typically generate capital gains and income distributions throughout the year as they trade in and out of investment positions.
If you’re a mutual fund investor, you could be subject to capital gains taxes at the end of each year. Mutual funds typically generate capital gains and income distributions throughout the year as they trade in and out of investment positions.Some years, a mutual fund may generate a lot of capital losses and net them against its realized capital gains (or carry over a lot of losses from prior years). This can reduce your capital gains tax bill.
Some years, a mutual fund may generate a lot of capital losses and net them against its realized capital gains (or carry over a lot of losses from prior years). This can reduce your capital gains tax bill.In other years, a mutual fund may generate a lot of capital gains. It will pass these gains through to shareholders, which can increase the shareholders’ capital gains tax. This can be more common when markets continually hit new highs over a prolonged period.
In other years, a mutual fund may generate a lot of capital gains. It will pass these gains through to shareholders, which can increase the shareholders’ capital gains tax. This can be more common when markets continually hit new highs over a prolonged period. ? Nerdy TipToward the end of the year, mutual fund companies typically provide investors with estimates of their capital gains distributions.
Toward the end of the year, mutual fund companies typically provide investors with estimates of their capital gains distributions.» MORE: This quiz can help you see if it's time to get a financial advisor
» MORE: » MORE: This quiz can help you see if it's time to get a financial advisor This quiz can help you see if it's time to get a financial advisor8. Donate appreciated assets
8. Donate appreciated assetsDonating highly appreciated securities to charity or bequeathing them to heirs when you die can lessen your estate's capital gains tax liability. This tax relief can be an additional perk on top of the tax deduction for charitable contributions.
Donating highly appreciated securities to charity or bequeathing them to heirs when you die can lessen your estate's capital gains tax liability. This tax relief can be an additional perk on top of the tax deduction for charitable contributions .If you leave your appreciated securities to heirs, typically they receive a step-up in cost basis upon your death
If you leave your appreciated securities to heirs, typically they receive a step-up in cost basis upon your death IRS.gov. Publication 526, Charitable Contributions. Accessed Nov 21, 2025. . This means that in the eyes of the IRS, the purchase price of the security becomes the value of the security on the day you died rather than what you originally paid for it.For example, if you bought 1,000 shares of stock for $1 per share in 1990 and the stock price is $100 per share on the day you die, the person who inherits your stock only pays capital gains tax on any profit above $100 per share. This step-up can dramatically reduce capital gains tax.
For example, if you bought 1,000 shares of stock for $1 per share in 1990 and the stock price is $100 per share on the day you die, the person who inherits your stock only pays capital gains tax on any profit above $100 per share. This step-up can dramatically reduce capital gains tax.» MORE: How donor-advised funds (DAFs) work
» MORE: » MORE: How donor-advised funds (DAFs) work9. Invest in distressed communities
9. Invest in distressed communitiesA qualified opportunity fund (QOF) is an investment fund that pools money from investors and uses it to invest in businesses or properties in low-income or economically distressed areas. Investors in QOFs get preferential capital gains tax treatment.
A qualified opportunity fund (QOF) is an investment fund that pools money from investors and uses it to invest in businesses or properties in low-income or economically distressed areas. Investors in QOFs get preferential capital gains tax treatment.Specifically, people who have sold investments at a profit may be able to defer or reduce the capital gains tax on those profits if they reinvest the profits in a qualified opportunity fund. The longer you hold your QOF investment, the greater your overall tax benefit.
Specifically, people who have sold investments at a profit may be able to defer or reduce the capital gains tax on those profits if they reinvest the profits in a qualified opportunity fund. The longer you hold your QOF investment, the greater your overall tax benefit.If you keep your QOF investment for more than five years, you get to increase the cost basis on your original capital gain by 10%, which effectively excludes you from having to pay capital gains tax on 10% of your original capital gain.
If you keep your QOF investment for more than five years, you get to increase the cost basis on your original capital gain by 10%, which effectively excludes you from having to pay capital gains tax on 10% of your original capital gain.If you've invested in a qualified rural opportunity fund, the benefit is bigger; your cost basis increases by 30% instead of 10%.
If you've invested in a qualified rural opportunity fund, the benefit is bigger; your cost basis increases by 30% instead of 10%.If you hold your QOF investment beyond 10 years, you'll owe no capital gains on any additional appreciation beyond what you paid
If you hold your QOF investment beyond 10 years, you'll owe no capital gains on any additional appreciation beyond what you paid Congress.gov. Summary: H.R.1 — 119th Congress (2025-2026). Accessed Nov 21, 2025. .» ALSO: Learn how 1031 exchanges work
» ALSO: » ALSO: Learn how 1031 exchanges work10. Consider securities-based lending
10. Consider securities-based lendingIf you want to sell an investment, but the amount of capital gains tax that the sale would generate is making you cringe, one option to consider is to get a loan instead and use the investment as collateral.
If you want to sell an investment, but the amount of capital gains tax that the sale would generate is making you cringe, one option to consider is to get a loan instead and use the investment as collateral.Many brokerage firms allow investors with taxable brokerage accounts to use their securities as collateral backing a line of credit. Having a line of credit means you can access cash at any time.
Many brokerage firms allow investors with taxable brokerage accounts to use their securities as collateral backing a line of credit securities as collateral backing a line of credit . Having a line of credit means you can access cash at any time.There are caveats: If the value of your investment drops, the brokerage firm therefore has less collateral against your loan and will usually issue a margin call. This is a request for additional assets to replenish the account, which can be a strain. Also, you can’t use securities-based lines of credit to buy other securities or repay margin loans
There are caveats: If the value of your investment drops, the brokerage firm therefore has less collateral against your loan and will usually issue a margin call margin call . This is a request for additional assets to replenish the account, which can be a strain. Also, you can’t use securities-based lines of credit to buy other securities or repay margin loans FINRA. Securities-Backed Lines of Credit Explained. Accessed Nov 21, 2025. .» MORE: How taxes on stocks work
» MORE: » MORE: How taxes on stocks work How taxes on stocks work11. Hire an advisor
11. Hire an advisorUnderstanding the various ways to curtail capital gains taxes can be beneficial for any investor, particularly those in higher tax brackets. However, it's critical to know the many rules and details associated with these strategies. Hiring a seasoned financial advisor can help you navigate these waters, particularly if they are or can work hand in hand with a tax advisor so that you can create an optimal tax-minimization strategy for your situation.
Understanding the various ways to curtail capital gains taxes can be beneficial for any investor, particularly those in higher tax brackets. However, it's critical to know the many rules and details associated with these strategies. Hiring a seasoned financial advisor can help you navigate these waters, particularly if they are or can work hand in hand with a tax advisor so that you can create an optimal tax-minimization strategy for your situation.» MORE: See our picks for the year's best financial advisors
» MORE: » MORE: See our picks for the year's best financial advisors See our picks for the year's best financial advisorsON THIS PAGE
1. If you’re going to buy and sell often, try to do it in a tax-advantaged account 1. If you’re going to buy and sell often, try to do it in a tax-advantaged account 2. Hold investments for at least a year, if it makes sense 2. Hold investments for at least a year, if it makes sense 3. Harvest tax losses 3. Harvest tax losses 4. Capitalize on lower-income years 4. Capitalize on lower-income years 5. Sell part of the investment rather than the whole thing 5. Sell part of the investment rather than the whole thing 6. Sell in advance of anticipated tax rate increases 6. Sell in advance of anticipated tax rate increases 7. Monitor mutual fund distributions 7. Monitor mutual fund distributions 8. Donate appreciated assets 8. Donate appreciated assets 9. Invest in distressed communities 9. Invest in distressed communities 10. Consider securities-based lending 10. Consider securities-based lending 11. Hire an advisor 11. Hire an advisorON THIS PAGE
1. If you’re going to buy and sell often, try to do it in a tax-advantaged account 1. If you’re going to buy and sell often, try to do it in a tax-advantaged account 2. Hold investments for at least a year, if it makes sense 2. Hold investments for at least a year, if it makes sense 3. Harvest tax losses 3. Harvest tax losses 4. Capitalize on lower-income years 4. Capitalize on lower-income years 5. Sell part of the investment rather than the whole thing 5. Sell part of the investment rather than the whole thing 6. Sell in advance of anticipated tax rate increases 6. Sell in advance of anticipated tax rate increases 7. Monitor mutual fund distributions 7. Monitor mutual fund distributions 8. Donate appreciated assets 8. Donate appreciated assets 9. Invest in distressed communities 9. Invest in distressed communities 10. Consider securities-based lending 10. Consider securities-based lending 11. Hire an advisor 11. Hire an advisor More like this Investment Basics Investing How Much Does a Financial Advisor Cost? Most financial advisors charge based on how much money they manage for you. Fees are typically 1% a year but can be lower. 2 By Andrea Coombes, Taryn Phaneuf Do You Need a Financial Advisor? 7 Ways to Tell You may need a financial advisor if you're facing big life changes, don't have financial goals, have complex compensation, high tax bills or for other reasons. Taryn Phaneuf How to Find Cheap or Free Financial Advice Quality financial advice is more accessible than ever — and much of it is free or inexpensive. Here's how to get it. Anna-Louise Jackson Retirement Calculator Are you on track to save enough for retirement? Use our calculator to check your progress, see how much retirement income you'll have and estimate how much more you should save. 2 By June Sham, Alana Benson