Selling stocks? 3 ways to help trim your tax bill

WHEN YOU SELL INVESTMENTS you’ve owned for years, you may be looking at significant gains — and a significant tax bill. Outside of a tax-deferred account, you could face a capital gains tax as high as 20%¹ on your profits (rates vary depending on your income — and there could be proposals in the future that could raise the capital gains rate).

Even a 20% tax “may be a small price to pay for success,” says Joe Curtin, head of CIO Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank. “You can celebrate keeping the 80%.” Still, there are several strategies you might consider discussing with your tax professional to help reduce what you may owe in capital gains taxes, Curtin suggests, including the three below.

Offset your gains by taking investment losses, too

“If a good part of your portfolio is up in value, while a smaller part is down,” Curtin says, “selling some of those ‘down’ investments at a loss — known as tax-loss harvesting — could help offset the tax you owe from the gains earned on your sale of better-performing stocks.” What’s more, if your capital losses are worth more than your capital gains in any given year, you can generally deduct up to $3,000 (or $1,500 if married and filing separately) of that excess from your ordinary income. And if your net capital losses exceed even that yearly limit, you can carry over the unused losses to claim in later years.²

Selling a poor performer to harvest a tax loss doesn’t necessarily mean giving up on investments you believe in. Maybe you own investments that have dropped in value since you bought them, but you want to keep them in your portfolio in the hopes of future gains. In that case, you could consider selling them, harvest the loss and then buy them again. Just work with your tax professional so that you’re waiting more than 30 days before repurchasing the same or similar stock — if you buy substantially similar investments 30 days before or after the initial sale, you might trigger wash-sale rules and the losses would not be allowed.

Stretch your investment gains over several years

Another option to discuss with your tax professional is to “spread the sale over multiple tax years — that can help ease the burden,” says Jonathon McLaughlin, investment strategist for Bank of America.

With an investment that has performed strongly, you might, for example, sell a portion of it at the end of 2024, another part during 2025 and the final portion at the beginning of 2026. That way you complete the sale in a little over 12 months while spreading potential capital gains over three tax calendar years for tax purposes, McLaughlin notes.

But don’t forget that waiting to sell involves risks. The advantages of holding on to those assets, McLaughlin notes, may not outweigh the benefits of selling immediately and reaping the rewards, even if it comes with a greater tax bill now.

Give away your investments more efficiently

To avoid paying capital gains taxes entirely, one option you may want to discuss with your tax advisor is to give certain appreciated investments away — either to charity or to your beneficiaries as part of your estate plan.

If you regularly donate to a particular charity, you might consider giving appreciated stock instead of cash. You may be able to deduct the fair market value of the stock if you’ve held it for more than one year (subject to certain adjusted gross income limitations). A charity typically does not have to pay capital gains taxes when it sells the shares, and you can use the cash you would have donated to purchase new investments. You can also give in this way by donating appreciated stock to a donor-advised fund.

The tax rules are different when you pass on investments to your beneficiaries. When assets go to your beneficiaries as part of your estate upon your death, the cost basis for tax purposes is generally stepped up to fair market value. However, if you give investments to your beneficiaries during your lifetime, the assets maintain a “carryover basis” or the same basis you held in the stock.

Any actions you may take should be based on your specific situation and needs rather than your desire to sidestep taxes, Curtin notes. So be sure to speak with your tax specialist and financial advisor before making any decisions.