Capital Gains Tax: Strategies for Maximizing Your Savings

Capital gains taxes often appear complex and daunting, but with a fresh perspective, understanding the nuances of this tax can unlock potential savings for investors and homeowners alike. Join us in unraveling the intricacies of capital gains tax, its rates, and strategies to minimize its impact on your finances.

Short Summary

• Understanding capital gains tax requires knowing the rate, filing status, and taxable income.
• Short-term capital gains are taxed at ordinary rates, while long-term ones have lower tax rates.
• Strategies such as using tax-advantaged accounts and offsetting losses can help reduce or eliminate taxes on capital gains.

What Exactly Are Capital Gains?

A capital gain happens when you sell something valuable for more than you paid for it. That “something” could be:

• Stocks and bonds
• Real estate (like a house or rental property)
• Cryptocurrency
• Collectibles like art, coins, or classic cars

The IRS looks at the difference between your sale price and your adjusted basis (usually what you paid, plus things like fees or improvements). If you sell for more, you have a gain. If you sell for less, you have a loss.

Why Do Capital Gains Taxes Matter?

Capital gains taxes matter because they directly affect how much money you keep after selling investments. For:

• Investors: Taxes can eat into your stock market or crypto profits.
• Business owners: Selling a business can trigger large capital gains.
• Homeowners: Selling your primary residence may allow you to exclude up to $250,000 ($500,000 for married couples) in gains from tax.
• High-net-worth individuals: Large investment portfolios mean even small tax rate differences can add up to thousands—or millions—saved or lost.

Realized vs. Unrealized Gains

Not all gains are taxed right away.

• Unrealized gains = the value of your asset has gone up, but you haven’t sold it yet. No tax is due.
• Realized gains = you sell the asset and lock in the profit. This is when taxes apply.

Short-Term vs. Long-Term Capital Gains

The length of time you own an asset determines how it’s taxed:

• Short-term capital gains: Owned for 1 year or less - taxed like regular income (same rate as your paycheck).
• Long-term capital gains: Owned for more than 1 year -taxed at lower, favorable rates.

This means that simply holding onto your investments longer can lower your tax bill.

U.S. Capital Gains Tax Rates for 2025

For assets you've held more than one year, the federal tax rates for long-term capital gains in 2025 are:

• 0% if your taxable income is up to about $48,350 (single filers), $96,700 (married filing jointly), or $64,750 (head of household).
• 15% if your income is above those 0% thresholds but below approximately $533,400 (single), $600,050 (married filing jointly), or $566,700 (head of household).
• 20% if your income is higher than those respective upper thresholds.

Additionally, for high earners, there may be a 3.8% surtax (Net Investment Income Tax) on top of those rates.

How Do I Know If I Owe Capital Gains Tax?

You may owe capital gains tax if:

• You sell an asset for a profit.
• You sell a home that doesn’t qualify for the primary residence exclusion.
• You sell crypto, stocks, or other investments for more than you paid.

If you don’t sell, you don’t owe. But if you realize a gain, the IRS expects its share.

Strategies to Reduce Capital Gains Taxes

Here are some practical ways to lower or avoid capital gains taxes:

1. Tax-Loss Harvesting: Offset capital gains by selling investments that have experienced losses. The losses can be used to reduce or eliminate the tax liability from capital gains.
2. Holding Period: Hold investments for more than one year to qualify for long-term capital gains tax rates, which are typically lower than short-term rates.
3. Step-up in Basis: Inherited assets receive a step-up in basis to the fair market value at the time of the owner's death. This can help minimize the capital gains tax liability when the inherited assets are sold.
4. Charitable Donations: Donate appreciated assets to qualified charities, as this can provide a deduction for the fair market value of the asset and eliminate the capital gains tax on the appreciation.
5. Tax-Advantaged Accounts: Utilize tax-advantaged accounts like Individual Retirement Accounts (IRAs) or 401(k)s to defer taxes on investment gains until withdrawals are made.
6. Tax-Advantaged Investments: Consider investing in tax-advantaged vehicles, such as municipal bonds or tax-exempt funds, which generate income exempt from federal or state taxes.
7. Installment Sales: Structure the sale of an asset as an installment sale, spreading the gain over several years to potentially lower the overall tax liability.
8. Capital Loss Carryover: If capital losses exceed capital gains in a given year, the excess loss can be carried forward to offset future gains in subsequent years.
9. Qualified Small Business Stock: Consider investing in qualified small business stock (QSBS) that offers potential tax benefits, such as exclusion or deferral of capital gains upon sale.
10. Estate Planning: Incorporate estate planning strategies to minimize capital gains tax for heirs, such as setting up trusts or gifting appreciated assets to beneficiaries.

Capital Gains and Retirement Accounts

One of the easiest ways to sidestep capital gains taxes is by using retirement accounts:

• Traditional IRA/401(k): No tax while investments grow; you pay income tax when you withdraw in retirement.
• Roth IRA/401(k): You pay taxes upfront, but qualified withdrawals in retirement are tax-free—including the gains.

Real Estate and Capital Gains

Selling property comes with its own rules:

• If it’s your main home and you lived there 2 of the last 5 years, you may exclude up to $250,000 ($500,000 married) in gains.

• It’s important to note that this exclusion does not apply to investment properties or second homes, which are still subject to capital gains taxes. To minimize capital gains tax on a second home or rental property, consider establishing it as a primary residence before selling it.

• Investment properties don’t qualify, but strategies like installment sales or 1031 exchanges can help defer taxes.

Cryptocurrency and Capital Gains

Cryptocurrency sales are subject to capital gains tax, with rates depending on the holding period and the taxpayer’s income. Similar to other capital assets, short-term capital gains on cryptocurrency are taxed at the same rate as ordinary income, while long-term capital gains are taxed at a lower rate. Therefore, holding onto your cryptocurrency investments for more than a year can result in lower capital gains tax rates.

To calculate capital gains tax on cryptocurrency, you must determine the difference between the sale price and the cost basis of the asset, and apply the appropriate tax rate based on the holding period and income. By understanding the tax implications of cryptocurrency investments and applying strategies to minimize capital gains tax, you can optimize your investment growth and reduce your tax burden.

When Are Capital Gains Taxes Paid?

Generally, you pay capital gains tax when you file your yearly tax return. However, if you make big profits, you may need to make quarterly estimated payments to avoid IRS penalties.

By accurately calculating your capital gains tax liability and making timely payments, you can ensure compliance with IRS requirements and avoid potential financial penalties. Consult with a tax advisor or financial planner to determine the best course of action based on your unique situation and tax obligations.

Net Investment Income Tax (NIIT)

The NIIT is a 3.8% tax imposed on certain investment income for individuals, estates, and trusts. It applies to individuals with modified adjusted gross income (MAGI) above specific thresholds and certain types of investment income such as interest, dividends, and capital gains from investments such as stocks, bonds, mutual funds, and real estate investments (unless derived from an active trade or business), rental and royalty income (unless derived from an active trade or business) and income from passive activities, such as partnerships, S corporations, and limited liability companies (LLCs). The NIIT is calculated as 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.

How H&CO Can Help

At H&CO, our team of bilingual tax professionals has over 30 years of experience helping individuals, families, investors, and businesses manage capital gains and other complex tax matters. Whether you’re selling a home, cashing out investments, or navigating international tax rules, we’re here to guide you.

With offices in Coconut Grove, Coral Gables, Aventura, and Fort Lauderdale, our CPAs are ready to help with all your tax planning and preparation needs.

Frequently Asked Questions

What is the capital gains tax?

Capital gains tax is a tax imposed on the profit earned from the sale or disposal of certain assets. Taxpayers usually pay capital gains tax on the profit at the long-term capital gains tax rate or at the short-term capital gains rate or ordinary income tax rate, depending on the holding period of the asset.

How much is the capital gains tax?

The specific amount of capital gains tax depends on factors such as income level, tax rates, and the duration of holding the asset. It is advisable to consult tax regulations or a tax professional for accurate information.

How to avoid capital gains tax on real estate?

Some methods to potentially minimize capital gains tax on real estate include utilizing a 1031 exchange, investing in Opportunity Zones, or considering a charitable remainder trust. Each strategy has specific requirements and potential implications, so professional guidance is advised.

How do I avoid taxes on short-term gains?

Avoiding taxes on short-term gains can involve strategies such as offsetting gains with capital losses, utilizing tax-advantaged accounts, or structuring investments as long-term to benefit from lower capital gains tax rates. Consulting with a tax professional can provide tailored guidance based on your circumstances.