The Informed Investor

Wealth Management: Managing Your Capital Gains Taxes

June 24, 2024

Capital gains. When you hear that term, do you feel good since it means you made a profit? Or instead, is the momentary joy overridden by the concern about taxes on it? Of course, you must pay taxes on your gains. But did you know there are strategies you can use to mitigate those gains? Many people know these strategies, but many more do not.

What Is a Capital Gain?

Let us start with a quick review of the basics. What is a capital gain?

A profit earned on the sale of a capital asset is referred to as a capital gain. Normally, these types of profits are taxed at a lower rate than ordinary income.

So, if you own shares of a stock that you bought for $10,000 two years ago and sold the shares for $15,000, you have a $5,000 capital gain.

Short Versus Long Term Capital Gains

Capital gains on assets held for less than one year are referred to as “short term capital gains”. Anything held for one year or more would be classified as a “long term” capital gain.

The government wants to encourage people to invest long-term, so the long-term capital gains tax rate is currently lower than the short-term rate. In fact, short-term capital gains are usually taxed at the same tax rate as ordinary income. (i)
If you invest and sell at a loss, you incur a capital loss. The capital loss can be used to offset capital gains, or if none exist, it can offset up to $3,000 per year of ordinary income. (ii)

How Can You Use This to Manage Your Capital Gains Taxes?

As your wealth grows, you (or your financial advisor) should be making adjustments—buying and selling to rebalance your accounts to your agreed-upon risk level and asset allocation but always mindful of tax implications.

Because taxes are a critical part of wealth management, your investment advisor should be providing you with information to monitor your tax situation and, if requested, work closely with your tax professional on this. At the Investment Counsel Company we have tax and estate planning experts on our team who help our clients with this.

More Important Today than Ever

Today, managing your taxes is growing in importance. Why? The country is at a unique point in time. We have low tax rates combined with record government deficits. In addition, we are struggling with a pandemic which has so far required trillions of dollars of stimulus and relief money. At some point, this money will need to be paid back, and an increase in taxes are an inherent part of that process.

President Biden has proposed increasing capital gains taxes quite dramatically for taxpayers making over $1,000,000 annually (or $500,000 for couples filing separate tax returns). Even if that is not you, these rates are likely to go up for more people over time. That is why it is important to keep this in mind going forward and plan accordingly.

Tips for Managing your Capital Gains Tax Liability

To prepare for possible tax increases, here are some general tips for better managing your capital gains liability going forward.

1. Utilize tax loss harvesting and tax swaps to offset gains

Anytime you book a gain, you have the opportunity to offset it with losses you take in that same tax year. Of course, losses offset your profits, so these are not necessarily good. However, there is a strategy that allows you to generate a loss for tax purposes, then redeploy the funds into a similar investment after a required 30-day waiting period. This is the IRS’ “wash sale rule.”

2. Consider donating stock instead of cash.

If you are planning to donate a certain amount to your favorite charity, consider donating highly appreciated stock of that same dollar amount. The nonprofit organization will receive the same amount of money and will pay no tax when they sell the stock. You will get an equivalent tax deduction if you are eligible for it, and avoid paying any capital gains on those shares.

3. Give family appreciated stock instead of cash.

If your adult children live on their own and have lower or moderate incomes, they may be subject to a 0% capital gains tax rate. For 2021 the 0% capital gains taxable income thresholds are $40,400 for single filers, $54,100 for head of household and $80,800 for married couples filing jointly. If that is the case, you can gift shares to them and they can sell them tax-free or at a lower tax rate as long as you do not exceed the annual gift tax exclusion per person. For 2021 the annual gift exclusion amount is $15,000 per donor, per recipient. Each individual can give away $15,000 to any individual they desire with no federal gift tax consequences. Married couples can combine these amounts and make $30,000 gifts to each individual.

You or Your Financial Advisor Must Be Proactive

As you can see, these types of strategies can help you lower your tax bill. The key is to be proactive. You cannot normally take advantage of these strategies last minute, they must be planned weeks or months in advance.

That is why it is important to work with a financial advisor who has experience using these tax-efficient strategies and can monitor your account for appropriate opportunities.

After all, every dollar you save on taxes goes directly to your bottom line. In today’s unpredictable world, strategies like these that increase your wealth with minimum additional risk are very prudent.

[i] Boyte-White, Claire. “Long-Term vs. Short-Term Capital Gains Rates—Which Is More Favorable?” Investopedia, July 18, 2020.
[ii] “Topic No. 409 Capital Gains and Losses | Internal Revenue Service,” n.d.


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