Investing can help to grow wealth. But selling investments, even very good ones, can trigger a tax bill that surprises people who weren’t expecting it.
Capital gains taxes are one of the most controllable costs in a portfolio. Not every investor pays attention to them—and that’s a mistake. A little planning here and there can make a meaningful difference in what you actually keep after the IRS takes its share.
At Bernath + Rosenberg, we believe that tax efficiency is a cornerstone of wealth accumulation and realizing your own life’s aspirations. After all, the less that goes to the IRS is more you keep for your own purposes.
Here is why managing capital gains is a significant part of tax efficiency and what steps you can take.
Short-Term vs. Long-Term Gains Distinction
When you sell an investment for more than you paid, the profit is a capital gain. How it gets taxed depends almost entirely on how long you held it. Hold an asset for one year or less and sell it at a profit; that’s a short-term gain, taxed at your ordinary income rate. Depending on your bracket, that could be as high as 37%.
Hold it longer than a year and the picture changes significantly. Long-term capital gains are taxed at preferential rates: 0%, 15%, or 20%, depending on your income. For many investors in their peak earning years, the 15% rate would apply and it is less than half of what a short-term gain would cost them.
The practical implication: If you’re a few weeks away from the one-year mark on a profitable position, it’s often recommended to wait. Selling a week too early can cost you tens of thousands of dollars in taxes on a large holding. Always remember: The calendar matters.
Tax-Loss Harvesting: Turning Losing Positions Into a Tax Benefit
Not every investment works out. When one doesn’t, you can sell it at a loss and use that loss to offset gains elsewhere in your portfolio. This is called tax-loss harvesting, and it’s a reliable tool available to investors with taxable accounts.
Here’s a simple example. Suppose you have a $15,000 gain on one position and a $10,000 loss on another. Sell both, and you’re only paying taxes on the net $5,000 gain—not the full $15,000. If your losses exceed your gains in a given year, you can use up to $3,000 of that remaining loss to offset ordinary income. Anything beyond that carries forward to future years.
One rule to know before you act: the wash-sale rule. The IRS prohibits you from claiming a loss if you buy back the same (or a “substantially identical”) security, within 30 days before or after the sale. If you do, the IRS disallows the immediate tax loss and that loss is added to the cost basis of your new investment, deferring the tax benefit until you sell the new asset.
To avoid the effect of the wash-sale rule, if you want to stay invested in that sector or asset class, you can purchase a similar but distinct fund or ETF in the interim. That keeps your market exposure intact while still allowing the tax benefit.
Consider the Benefits of Asset Location
Asset location is an often-overlooked planning consideration. The basic idea: some investments generate more taxable activity than others, and placing them in the right type of account can reduce what you owe each year.
Tax-inefficient assets (such as bonds, actively managed funds with high turnover, real estate investment trusts) tend to generate ordinary income and short-term distributions regularly. These belong in tax-advantaged accounts like traditional or Roth IRAs and 401(k)s, where that income is sheltered until withdrawal.
Tax-efficient assets (index funds, stocks you plan to hold long-term) generate less taxable activity and are generally better suited to taxable brokerage accounts. Instead of changing what you own, the focus is where to hold them to minimize the tax impact.
Mutual Fund Distributions Can Catch Investors Off Guard
If you invest in mutual funds, watch for year-end capital gains distributions. When a fund manager sells holdings inside the fund at a profit, those gains get passed along to shareholders, even if you never sold a single share yourself.
You can end up with a tax bill on gains you didn’t know about until the Form 1099 arrives and from which you didn’t benefit directly.
A few ways to manage this:
- Wait to buy into a fund after its year-end distribution date.
- Choose tax-managed mutual funds or ETFs (which inherently use a creation/redemption mechanism) that minimize turnover.
- Hold these types of funds in tax-deferred accounts where the distributions don’t create an immediate liability.
Low-Income Years Are an Opportunity, Not Just a Hardship
If your income drops in a given year (whether from a job transition, sabbatical, business loss, or early retirement), you might want to look at your portfolio with fresh eyes. Lower income can put you in a tax bracket where long-term capital gains are taxed at 0%.
For 2026, the 0% long-term capital gains rate applies to single filers with taxable income up to $49,200, and to married couples filing jointly with income up to $98,400. If you’re in that range, realizing gains intentionally can make sense. You’re essentially locking in appreciation at no tax cost (what’s sometimes called a “gain harvesting” strategy) and resetting your cost basis higher for future years.
High Earners Need to Account for the Net Investment Income Tax
If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), an additional 3.8% tax applies to net investment income, on top of capital gains, dividends, and interest taxes. This is the Net Investment Income Tax, or NIIT.
It doesn’t apply to wages, retirement plan distributions, or Social Security, but it does stack on top of regular capital gains rates. For someone in the top long-term gains bracket (20%), that brings the effective rate to 23.8%. Building a withdrawal or sale strategy around your annual income level can help keep you below this threshold in some years.
Charitable Giving As a Capital Gains Strategy
If you give to charity and hold appreciated securities, donating the securities directly (rather than selling them and donating the cash) sidesteps capital gains tax entirely. You receive a charitable deduction for the full current market value and never pay tax on the appreciation. The charity, as a tax-exempt entity, doesn’t pay it either.
Donor-advised funds work particularly well here. You can contribute appreciated stock to the fund in a high-income year, take the deduction immediately, and distribute the grants to specific charities over time.
Putting it Together
Many of these strategies work best as part of an overall tax-planning strategy. The goal is to look at timing, portfolio structure, income levels, and charitable intentions all at once and make decisions that reflect the full picture.
Tax planning around capital gains doesn’t focus on avoiding paying your share, but on being deliberate with the choices you do have control over, so that your portfolio works as efficiently as possible. Tax laws change often and it’s usually best to regularly review your own tax situation with a qualified tax professional.
If you’d like to talk through how these strategies might apply to your specific situation, contact our team at Bernath + Rosenberg or reach Ted directly at tstricker@brwealth.com.
Frequently Asked Questions
1. What is the difference between short-term and long-term capital gains, and why does it matter?
The primary difference lies in the holding period of the investment and how the profit is taxed.
- Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income rate, which can reach as high as 37%.
- Long-term capital gains apply to assets held for more than a year and enjoy preferential tax rates of 0%, 15%, or 20% depending on your overall income.
Because selling an asset even a few weeks before hitting the one-year mark can shift your profit from a long-term rate to a short-term rate, paying attention to the calendar can prevent you from losing thousands of dollars to unnecessary taxes.
2. How does tax-loss harvesting work, and what is the “wash-sale rule”?
Tax-loss harvesting is the practice of selling losing investments to offset capital gains realized elsewhere in your portfolio, thereby reducing your net taxable income. If your overall losses exceed your gains in a single year, you can use up to $3,000 of the remaining balance to offset ordinary income, carrying the rest over into future years.
However, you must watch out for the IRS wash-sale rule. This rule prohibits you from claiming a tax loss if you buy back the same or a “substantially identical” security within 30 days before or after the sale. If you violate this rule, the immediate tax benefit is disallowed and instead added to the cost basis of your new investment.
3. What are year-end mutual fund distributions, and how can I avoid being caught off guard by them?
Mutual fund distributions occur when a fund manager sells internal holdings at a profit and passes those capital gains along to the shareholders. This means you can get hit with an unexpected tax bill on gains you didn’t directly trigger or know about until your Form 1099 arrives—even if you never sold a single share of the mutual fund itself.
To manage this risk, you can:
- Wait to purchase shares in a mutual fund until after its scheduled year-end distribution date.
- Invest in tax-managed mutual funds or exchange-traded funds (ETFs), which naturally use creation and redemption mechanisms that lower internal turnover.
- Hold turnover-heavy mutual funds inside tax-deferred accounts (like IRAs or 401(k)s) where annual distributions do not trigger immediate tax liabilities.
About Ted
Ted Stricker, CFP®, is a partner at Bernath + Rosenberg with over 27 years of experience specializing in custom financial plans for business owners and affluent families. Since joining the firm in 2015, he has led the wealth management team in delivering practical, independent advice tailored to each client’s unique lifestyle and goals. Based out of the firm’s multi-state offices, Ted is a member of the Financial Planning Association and helps maintain Bernath + Rosenberg’s standing as a top-ranked national CPA firm in financial planning.
Professionals associated with Bernath & Rosenberg P.C. may be either (1) registered representatives with, and securities and advisory services offered through LPL Financial, Member FINRA/SIPC, a registered investment advisor; or (2) solely tax professionals of Bernath & Rosenberg P.C., and not affiliated with LPL Financial. Tax/accounting/CPA-related services offered through Bernath & Rosenberg P.C. is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or tax/accounting/CPA-related services.
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This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisorETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.​
