If you’ve made money from selling stocks, real estate, or other investments, congratulations! But don’t celebrate just yet, you may owe capital gains tax. Understanding how this tax works can help you avoid surprises and potentially save thousands of dollars with smart planning.
In this post, we’ll look at:
- The difference between short-term and long-term capital gains
- Key strategies to reduce your capital gains tax
- How 1031 exchanges benefit real estate investors
What Is Capital Gains Tax[1]?
A capital gain is the profit you make when you sell a capital asset — like stocks, bonds, property, or cryptocurrency — for more than you paid for it. The IRS taxes this gain, and the amount you owe depends on how long you held the asset before selling.
⏱️ Short-Term vs. Long-Term Capital Gains
| Holding Period | Tax Type | Tax Rate |
|---|---|---|
| 1 year or less | Short-term | Taxed as ordinary income (10%–37%) |
| More than 1 year | Long-term | Taxed at lower capital gains rates: 0%, 15%, or 20% depending on income |
📌 Example:
- You buy stock for $1,000 and sell it 9 months later for $1,500
→ $500 gain = short-term → taxed at your regular income tax rate - You sell after 13 months
→ $500 gain = long-term → taxed at 0–20% depending on your income level
2025 Long-Term Capital Gains Rates[2]:
When you sell an asset you’ve held for more than one year, your profit qualifies for long-term capital gains tax rates, which are significantly lower than short-term rates.
These rates are 0%, 15%, or 20%, depending on your filing status and income level. Here’s how they generally break down for the 2025 tax year:
| Filing Status | 0% Rate Up To | 15% Rate | 20% Rate Over |
|---|---|---|---|
| Single | $48,350 | $48,351–$533,400 | $533,400+ |
| Married Joint | $96,700 | $96,701–$600,050 | $600,050+ |
📌 Tip: If your total taxable income is low enough to fall within the 0% bracket, you could legally pay no tax on long-term capital gains!
Strategies to Reduce Capital Gains Tax
📆 Hold Assets for Over 1 Year
Converting short-term to long-term gains can cut your tax rate in half or more.
💸 Offset Gains with Capital Losses (Tax-Loss Harvesting)[1]
You can use investment losses to reduce your gains — and deduct up to $3,000 ($1,500 if married filing separately) of losses against ordinary income each year.
🧾 Contribute to Retirement Accounts
Selling investments inside tax-advantaged retirement accounts like Roth IRAs or 401(k)s can significantly reduce — or even eliminate — capital gains tax liability. Here’s how each account type works:
| Account Type | Capital Gains Tax While in Account | Tax at Withdrawal | Tax-Free Withdrawal Conditions |
|---|---|---|---|
| Roth IRA | ❌ No capital gains tax | ❌ No tax on qualified withdrawals | Account open ≥ 5 years AND age ≥ 59½ or qualified exception |
| Traditional 401(k) | ❌ No capital gains tax | ✅ Taxed as ordinary income | After age 59½ (early withdrawal penalties apply otherwise) |
| Roth 401(k) | ❌ No capital gains tax | ❌ No tax on qualified withdrawals | Account held ≥ 5 years AND age ≥ 59½ or qualified exception |
🧑🎓 Use the Lifetime Capital Gains Exclusion (for Home Sales)[3]
If you’ve lived in a primary residence for 2 of the last 5 years, you may exclude:
- Up to $250,000 (single)
- Up to $500,000 (married filing jointly)
🎁 Gift or Inherit Assets
- Gifting appreciated assets to a lower-income family member can reduce overall tax burden
- Inherited assets receive a “step-up in basis[4]“, so heirs pay tax only on post-inheritance gains
1031 Exchange: A Powerful Tool for Real Estate Investors
Real estate investors have a unique way to defer capital gains taxes: the Section 1031 like-kind exchange[5].
✅ What Is a 1031 Exchange?
It lets you sell an investment property and reinvest the proceeds into another similar property — without paying capital gains tax at the time of sale.
Key Requirements:
- Both properties must be for investment or business use
- The replacement property must be identified within 45 days and closed within 180 days
- You must use a qualified intermediary (you can’t touch the proceeds)
💡 The tax is deferred, not eliminated. If you cash out later, you’ll owe capital gains tax at that time.
Capital gains tax can take a big bite out of your investment profits — but with careful planning, you can lower or delay what you owe.
Whether it’s holding your investments longer, offsetting gains with losses, or taking advantage of IRS rules like the 1031 exchange, these strategies can lead to substantial tax savings.
📌 Before selling major assets, consult with a tax advisor to develop a strategy that fits your financial goals.
🔗 Useful Resources:
- [1] IRS, Topic no. 409, Capital gains and losses
- [2] Tax Foundation, 2025 Tax Brackets
- [3] IRS, Topic no. 701, Sale of your home
- [4] Tax Foundation, Step-Up In Basis
- [5] IRS, Like-Kind Exchanges Under IRC Section 1031[pdf]
- 401(k), IRA, and Roth IRA: Which Retirement Plan Is Best?
