How to reduce your capital gains tax
You can legally lower capital gains tax by holding assets over a year for the preferential long-term rates, harvesting losses to offset gains, realizing gains in low-income years to land in the 0% bracket, using tax-advantaged accounts, claiming the home-sale exclusion, donating appreciated assets, and using a 1031 exchange for real estate. Each has conditions. General information, not tax advice - confirm with a professional.
Source: IRS Topic No. 409, Capital Gains and Losses. Data as of June 2026.
Strategies at a glance
| Strategy | How it helps | Watch out for |
|---|---|---|
| Hold over 1 year | Long-term 0/15/20% instead of ordinary rates | Market risk while you wait |
| Tax-loss harvesting | Losses offset gains; $3,000/yr against income | Wash-sale rule (30 days) |
| Realize in a low-income year | May land the gain in the 0% band | Other thresholds (NIIT, ACA, IRMAA) |
| 401k / IRA / Roth | Gains grow tax-deferred or tax-free | Contribution limits, withdrawal rules |
| Home-sale exclusion | Exclude $250k/$500k of main-home gain | 2-of-5-year ownership/use test |
| Donate appreciated assets | Avoid the gain + get a deduction | Must itemize; appraisal rules |
| 1031 exchange (real estate) | Defer the gain into a like-kind property | Strict timelines; investment property only |
Mind the thresholds
Realizing a big gain can push you over income thresholds that trigger the 3.8% NIIT, higher Medicare premiums (IRMAA), or loss of credits. Spreading sales across years, or pairing them with losses, keeps you under those lines. See how to calculate the tax and your state's treatment before acting.
Frequently asked questions
How can I legally reduce capital gains tax?
Common legitimate strategies: hold assets over a year for long-term rates, harvest capital losses to offset gains, time sales for years when your income (and bracket) is lower, use tax-advantaged accounts (401k, IRA, Roth), claim the home-sale exclusion, donate appreciated assets, and for real estate consider a 1031 exchange. All have rules and limits.
What is tax-loss harvesting?
Selling investments at a loss to offset realized gains, reducing your taxable gain. Net losses up to $3,000 a year can also offset ordinary income, with the remainder carried forward. Beware the wash-sale rule: you cannot claim the loss if you rebuy a substantially identical security within 30 days.
How do I pay 0% capital gains tax?
If your total taxable income (including the gain) stays under your filing status's 0% long-term threshold, your long-term gain is taxed at 0% federally. This is most achievable in low-income years - for example, early retirement before Social Security or pensions begin. State tax may still apply.
Related
Last updated: 2026-06-21