Here’s How to Avoid Paying Capital Gains Tax

One question we often receive is, “How can we avoid paying capital gains tax?” Capital gains taxes typically occur when you buy an investment such as a house, rental property, investment portfolio stock, etc. When you buy an investment and hold it for less than a year, you pay regular income tax on it, but capital gains tax gets applied based on your income.  Since there are different levels of income, the percentage of taxes varies. It could be 0% capital gains tax, which is unusual because you’d basically need to have no income for that to apply. It could be 15% of capital gains tax, or 20% if your income is around 400,000 or more. This tax is applied to the gains on the investment. For instance, if you bought a hundred thousand dollars in stock, and the value of the stock increased to two hundred thousand. If you were to sell it, you’d pay income tax on the hundred thousand dollars. 

Ways to Avoid Capital Gains Taxes

There are a couple of ways that you can avoid capital gains tax. The first one is harder, which is if you were in a time period where you don’t have any earned income or taxable income. There is a threshold that can differ for single versus married filers. The other option would be to use a capital gains harvesting strategy in your portfolio. A good wealth manager should already be applying this strategy to your investments. There are always opportunities to sell stocks for a loss while still being invested. A good example would be selling SPY, the S&P 500 ETF, and buying VOO the Vanguard S&P 500 ETF.  This strategy is called tax loss harvesting, and by doing it you can create a negative tax credit. For example, we had a portfolio last year from which we were able to harvest about $300,000 in capital losses, while remaining invested in the same underlying securities. It’s important to know that inside IRAs or other retirement accounts you don’t pay capital gains tax. Tax payment occurs when you withdraw money from the account. Therefore, this strategy would not apply to these type of accounts.