Key points:
- Long-term gains on publicly traded securities are taxed lower than ordinary income rates.
- High earners face an additional 3.8% Net Investment Income Tax.
- You can use investment losses to offset gains.
- Donating stock held over a year avoids capital gains tax
Trading and selling publicly traded securities—like stocks, bonds, and ETFs—is an excellent way to build wealth. However, that growth eventually triggers a tax liability on your earnings.
While paying capital gains tax is a sign of a successful investment, there are several tax strategies you can use to minimize that bill. Note that the strategies below focus on federal tax liability; state taxes vary significantly and are not factored into these calculations.
1. The “Buy and Hold” Advantage
The simplest way to shrink your tax bill iis to hold your investments for at least one year and one day.
- Short-Term Gains: If you sell an asset held for a year or less, it is taxed as “ordinary income” at your standard bracket (up to 37%).
- Long-Term Gains: Assets held longer than a year qualify for preferential rates of 0%, 15%, or 20% depending on your taxable income.
2026 Example: Kevin and Kim are both in the 24% income tax bracket. They both buy shares of Tesla at the same time.
- Kevin sells 6 months after purchasing the stock. His gain is taxed at 24%.
- Kim sells after 14 months. Her gain is taxed at the long-term rate of 15%. On a $10,000 gain, Kim saves $900 simply by waiting a few extra months to sell.
The 3.8% Surtax (NIIT): High-income earners must also account for the Net Investment Income Tax (NIIT). If your Modified Adjusted Gross Income (MAGI) exceeds $200,000 (Single) or $250,000 (Married Filing Jointly), you may owe an additional 3.8% on your investment income. This can bring your total federal long-term rate to 23.8%.
2. Practice Tax-Loss Harvesting
If you have some “winners” (stocks that went up) and some “losers” (stocks that went down), you can sell the losers to offset the gains from the winners. This is called Tax-Loss Harvesting.
- The Netting Rule: Your losses first cancel out your gains.
- The $3,000 Limit: If your total losses exceed your gains, you can use up to $3,000 ($1,500 if married filing separately) to offset your regular income (like your salary). Any remaining loss can be “carried forward” to future tax years.
CPA Note: Watch out for the “Wash Sale” rule. You cannot buy the same or “substantially identical” stock within 30 days before or after the sale, or the IRS will disallow the loss.
3. Lower Your Taxable Income
Since your capital gains rate is determined by your total taxable income, reducing that income can “bump” your gains into a lower tax bracket—potentially the 0% long-term rate.
2026 Contribution Limits:
- Maximize your 401(k): For 2026, the individual contribution limit has increased to $24,500. (If you are age 50+, the catch-up limit is $8,000, for a total of $32,500).
- Fund a Health Savings Account (HSA): If you have an eligible high-deductible plan, you can deduct up to $4,400 for self-only coverage or $8,750 for family coverage in 2026.
- Traditional IRA: The 2026 contribution limit is $7,500 ($8,600 if 50+). Contributions may be tax-deductible depending on your income and workplace retirement plan.
4. Donate Appreciated Stock
If you are charitably inclined, donating appreciated publicly traded stocks held for more than a year is a “double” tax win. However, the 2026 rules introduce new hurdles you must clear to get the full benefit.
The Strategy:
- Eliminate Capital Gains: You avoid the tax you would have paid if you sold the asset first.
- Full Fair Market Value Deduction: If you itemize, you can often deduct the full fair market value of the security on the date of the gift.
New for 2026: The 0.5% AGI Floor For the 2026 tax year, itemizers face a new “floor.” You can only deduct the portion of your total charitable contributions that exceeds 0.5% of your Adjusted Gross Income (AGI).
- Example: If your AGI is $200,000, your floor is $1,000. If you donate $5,000 in stock, only $4,000 is actually deductible.
2026 AGI Limits & Carryforwards:
- 30% AGI Limit: For publicly traded securities donated to public charities, your deduction is capped at 30% of your AGI for the year. (Cash donations, by comparison, are capped at 60%).
- 5-Year Carryforward: If your donation is so large that it exceeds the 30% limit, don’t worry—the “excess” isn’t lost. You can carry forward the unused portion for up to five years.
- High-Earner Cap: If you are in the top 37% tax bracket, the actual “value” of your deduction is now capped at 35% starting in 2026.
Conclusion
Tax planning for your portfolio is a year-round job. By focusing on long-term holding periods, maximizing your 2026 retirement contributions, and strategically timing your charitable gifts to clear the new 0.5% floor, you can significantly reduce the amount you owe the IRS.
Disclaimer: This content is provided by The Little CPA for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, tax, legal, or accounting advice. No accountant-client relationship is formed by your use of this website. Because tax laws and regulations are complex and subject to change, the information provided here may not be accurate or complete for your specific situation. You should consult with your own qualified tax, legal, and accounting professionals before engaging in any transaction or making financial decisions.
