Capital gains taxes are one of the most manageable categories in the tax code — with the right planning. The strategies available to investors who think ahead are meaningfully better than those available to investors who optimize after the fact.
The rate structure
The most fundamental distinction is the holding period:
- Short-term capital gains (assets held one year or less) are taxed as ordinary income — at your marginal rate, which can be as high as 37%
- Long-term capital gains (assets held more than one year) are taxed at preferential rates: 0%, 15%, or 20% depending on taxable income
High-income taxpayers also owe the 3.8% Net Investment Income Tax (NIIT) on investment income above $200,000 (single) or $250,000 (married filing jointly), bringing the effective long-term rate to 23.8% at the top.
The wash sale rule
Tax-loss harvesting — selling investments at a loss to offset gains — is the most widely used capital gains strategy. But it comes with a critical restriction: the wash sale rule. If you sell a security at a loss and buy the same or "substantially identical" security within 30 days before or after the sale, the loss is disallowed. The 30-day period runs on both sides of the sale date, creating a 61-day window to stay out of the position.
Wash sale rules apply across accounts — you can't sell at a loss in your taxable account and immediately buy the same security in your IRA. The IRS looks at all accounts you control.
Tax-loss harvesting execution
The mechanics: identify positions at a loss, sell them before year-end, and use the proceeds to buy a similar (but not substantially identical) security to maintain market exposure. After 31 days, you can repurchase the original holding if desired.
Net capital losses can offset net capital gains dollar for dollar. If losses exceed gains, you can deduct up to $3,000 against ordinary income annually, with excess losses carried forward indefinitely.
Charitable giving of appreciated securities
Donating appreciated securities directly to a charity eliminates capital gains tax entirely while generating a charitable deduction for the full fair market value. This is strictly superior to selling the security, paying the tax, and donating cash — yet surprisingly few investors use it.
Qualified Opportunity Zone investments
Investors with large capital gains can defer — and partially eliminate — the tax by investing the gain proceeds into a Qualified Opportunity Zone fund within 180 days of the gain event. Gains deferred are recognized by December 31, 2026 (or upon sale of the QOZ investment, if earlier). Appreciation in the QOZ investment held for 10+ years can be excluded from tax entirely.
QOZ investing involves illiquidity and substantial due diligence requirements — it is appropriate for some investors and not others. Consult with a tax professional before committing.
