Personal Finance | 058 How to Minimize Capital Gain Tax

Summary: Hold the stocks for more than one year before selling or after retirement. Use tax-loss harvesting if any stocks underperform. If you get RSU, you can either sell it within 30 days, please refer to How to Manage RSU for more information. 

Capital gains tax in the U.S. is determined by how long an asset is held before being sold.

• Short-term capital gains (assets held for 1 year or less) are taxed as ordinary income, with rates ranging from 10% to 37%.
• Long-term capital gains (assets held for more than 1 year) are taxed at 0%, 15%, or 20%, depending on the taxpayer’s income.
• For high-income earners (married couples earning over $250,000), an additional 3.8% Net Investment Income Tax (NIIT) applies to both short-term and long-term gains.

If a married couple with an annual income exceeding $250,000 sells stocks with a $200,000 gain, the tax treatment depends on the holding period.

• If the stocks are sold within 1 year, the entire $200,000 is taxed as ordinary income at the top marginal rate of 37%, plus 3.8% NIIT, totaling 40.8%. The tax due would be $81,600.
• However, if the stocks are sold after holding for more than 1 year, the long-term capital gains tax rate of 20% plus 3.8% NIIT applies, resulting in a total tax of $47,600 — saving $34,000 compared to short-term.

To minimize capital gains tax, the best option in this case is to hold the stocks for more than one year before selling. Additionally, strategies like the following can reduce the tax burden:

• tax-loss harvesting (selling underperforming assets to offset gains)
• donating appreciated stocks to charity (avoiding capital gains tax entirely)
• using tax-advantaged accounts (such as IRAs or 401(k)s) for asset allocation can further reduce the tax burden.

Planning sales for years with lower income or utilizing opportunity zone investments can also help optimize tax outcomes. For example, If your income after retirement is $75,000 and your capital gain was $20,000, your total taxable income would be $95,000. This amount is above the $89,250 limit, meaning:

• ​The first $14,250 of your capital gain would be taxed at 0% (to reach the $89,250 limit).
  
• The remaining $5,750 would be taxed at 15%.

Therefore, it might be a good choice to hold the assets till retirement.