By Ted Stricker, CFP®
A Big Investment Payoff… and the Taxes That Follow
So you bought that unicorn stock 10 years ago. Back then, it was a risky bet on a small company with big potential. Now the company has taken off, your shares have skyrocketed in value, and you’re ready to cash out to build your dream home.
Simple, right?
Not so fast.
Before you celebrate the windfall, it’s important to understand the tax consequences that can come with selling a highly appreciated investment. For high-income investors, long-term capital gains can be taxed at rates up to 20%.
Some investments can face even higher rates. For instance, the taxable portion of gains from selling qualified small business stock may be subject to a maximum 28% rate in certain circumstances. Gains from selling collectibles, such as coins, artwork, or antiques, are also taxed at a maximum rate of 28%.
That means selling a big winner in your portfolio can trigger a significant tax bill if the transaction isn’t planned carefully.
But several planning strategies may help investors manage the tax consequences of selling appreciated assets. With thoughtful planning and coordination between investment and tax strategies, investors may be able to keep more of their returns working toward long-term goals.
Here are nine approaches investors often consider when managing taxes on investment gains.
1. Hold Investments Long Enough to Qualify for Lower Tax Rates
The length of time you hold an investment can influence the tax rate applied to any gains. Short-term gains (profits from investments held for one year or less) are typically taxed at ordinary income rates, which may be significantly higher than long-term capital gains rates.
Holding investments for more than one year allows gains to be taxed at the lower long-term capital gains rate, which may make a meaningful difference in after-tax returns.
For investors in the top tax brackets, the difference between short-term and long-term capital gains rates can be substantial.
2. Offset Gains With Strategic Tax-Loss Harvesting
Tax-loss harvesting involves selling investments that have declined in value to offset gains realized elsewhere in the portfolio. This strategy can help reduce overall tax liability on profitable trades.
Investors should be mindful of the IRS wash-sale rule, which prevents a loss from being claimed if a substantially identical security is repurchased within 30 days.
3. Place Investments in the Most Tax-Efficient Accounts
Where investments are held can be just as important as which investments you own. Some assets generate more taxable income than others.
For example, income-producing investments may be better suited for tax-advantaged accounts, while tax-efficient investments like broad equity index funds may work well in taxable accounts. This strategy, often called asset location, can help improve after-tax portfolio performance.
4. Use Charitable Giving to Reduce Taxable Gains
Your passion and generosity can also factor into your tax strategy.
Donating appreciated securities directly to a qualified charity can be a tax-efficient way to support causes that matter to you. By giving the asset instead of selling it first, investors may avoid paying capital gains taxes on the appreciation.
In many cases, donors may also receive a charitable deduction based on the fair market value of the securities.
Charitable giving vehicles, such as donor-advised funds, can further enhance flexibility, allowing you to contribute appreciated assets, take a deduction in the current year, and recommend grants to charities over time.
5. Consider Gifting Appreciated Assets to Family Members
Another strategy some investors explore is gifting appreciated assets to family members.
Under current rules, individuals may gift up to $19,000 per recipient per year without triggering gift tax or using any of their lifetime exemption. In some situations, transferring appreciated investments to family members who are in lower tax brackets may reduce the overall tax burden when those assets are eventually sold.
This approach is often used as part of multigenerational wealth planning, allowing families to shift assets strategically while supporting children or grandchildren financially.
6. Time the Sale of Investments Carefully
The timing of investment sales can affect the tax owed in a given year. For example, investors may choose to realize gains during years when income is lower, which could place them in a lower capital gains tax bracket.
Planning the timing of gains alongside other income sources may help reduce overall tax exposure.
7. Take Advantage of Tax-Advantaged Retirement Accounts
Retirement accounts such as IRAs and employer-sponsored plans allow investments to grow without current capital gains taxation.
By placing certain investments inside these accounts, investors may defer taxes and potentially benefit from years of tax-deferred growth.
8. Use Carryforward Losses From Previous Years
If investment losses exceeded gains in prior years, those losses may be carried forward to offset future capital gains.
This rule allows investors to apply past losses to reduce taxes on gains realized in later years.
9. Integrate Tax Planning Into Your Overall Investment Strategy
An effective way to manage investment taxes is to approach them proactively rather than reactively. Taxes are often one of the largest factors affecting long-term investment returns. Coordinating tax planning with portfolio management, charitable strategies, estate planning, and retirement income decisions may help improve overall tax efficiency.
If you’d like personalized guidance for your unique situation, Bernath + Rosenberg would love to help. To schedule a consultation, get in touch by calling (212) 221-1140 or emailing tstricker@brwealth.com.
Frequently Asked Questions About Donor-Advised Funds
What is the difference between short-term and long-term capital gains?
Short-term capital gains apply to investments held for one year or less and are taxed at ordinary income tax rates, which can be as high as 37% for high-income investors. Long-term capital gains apply to investments held for more than one year and are generally taxed at lower rates, typically 0%, 15%, or 20%, depending on income.
How can investors reduce taxes on investment gains?
Investors may consider strategies such as holding investments long enough to qualify for long-term capital gains treatment, tax-loss harvesting, using tax-advantaged accounts, donating appreciated securities to charity, or gifting assets to family members in lower tax brackets. These strategies are often part of a broader tax-planning approach.
Is donating appreciated stock better than donating cash?
In many cases, donating appreciated securities directly to a qualified charity can be more tax-efficient than selling the investment and donating cash. By donating the asset itself, investors may avoid capital gains taxes on the appreciation while still supporting charitable causes.
About Ted
Ted Stricker is a partner and financial advisor at Bernath + Rosenberg, a full-service accounting, tax, and wealth management firm with offices in Monsey, NY, Lakewood, NJ, Cedarhurst, NY, and Miami Beach, FL. The firm demonstrates a personalized approach to custom-tailored solutions and an unwavering commitment to client service. With over 27 years of experience in the financial services industry, Ted manages the firm’s wealth management team, and specializes in designing financial plans for business owners and affluent families. Since joining the team in 2015, he provides practical and sound advice, combining independent approaches and solutions that reflect clients’ personality, lifestyle, and goals.
For the ninth year in a row, Bernath + Rosenberg has been named as one of the leading CPA firms in financial planning by Accounting Today, a publication that receives hundreds of submissions each year and features the Top 150 Firms in the nation. Ted is a CERTIFIED FINANCIAL PLANNER® practitioner and is a member of the Financial Planning Association. To learn more about Ted, connect with him on LinkedIn.
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.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk, including loss of principal. No strategy assures success or protects against loss.
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 advisor.
