Capital Gains and Losses: How to Strategically Lower Your Tax Bill

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As the end of the year approaches, your tax situation becomes clearer. Most people are quick to remember that IRA distributions you’ve taken this year and any work earnings are taxable as ordinary income. What’s often missed is the impact of capital gains and losses on your tax bill, which can result in much higher taxes due or missed opportunities to save. 

In this post you’ll learn:

• How capital gains and losses work – and what they really mean for your taxes

• Ways to turn capital gains and losses into an intentional tax-saving strategy

• Why the step-up in cost basis can create major tax advantages for your heirs

• How to harvest losses without triggering the IRS wash-sale rule

Defining Capital Gains and Capital Losses

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First, let’s start with a clear definition and a simple example.

Capital gains occur when you sell an asset for more than you paid for it.

• Short-term gains come from assets held for one year or less and are taxed at your ordinary income tax rate.

• Long-term gains come from assets held for more than one year and qualify for lower capital gains tax rates.

  
  

Capital losses happen when you sell an asset for less than what you paid. Just like with gains, there are short-term and long-term losses. 

Capital gains and losses apply to assets you own such as investments, real estate, and business interests.

Example:

John sells 100 shares of XYZ company stock for $50 per share in his brokerage account. He purchased the stock two years ago for $40 per share. 

His long-term capital gain = $1,000 ($10 gain per share * 100 shares)  

Capital Gain Tax Treatment

Capital gains and losses only have an impact on your taxes when the asset is sold and the gain/loss is “realized”. 

When you sell an investment for a gain or loss, it will have an impact on your taxes in the year of sale. The transaction will show up on your 1099 tax document from your custodian and is reported on Schedule D of your federal tax return for that year. 

The good news: long-term capital gains (on assets held for more than one year) are taxed at lower rates than ordinary income. Below are the 2025 long-term capital gains tax brackets:

Tax year 2025

Filing Status	0% Rate	15% Rate	20% Rate
Single	$0 → $48,350	$48,351 → $533,400	Over $533,400
Married Filing Jointly	$0 → $96,700	$96,701 → $600,050	Over $600,050
Married Filing Separately	$0 → $48,350	$48,351 → $300,000	Over $300,000
Head of Household	$0 → $64,750	$64,751 → $566,700	Over $566,700

Note: These are taxable income thresholds (i.e. after deductions).

Short-term gains are realized when you sell an asset that you’ve owned for one year or less for a profit. In this case, you pay taxes on the gains at your ordinary income tax rate, not the lower capital gains tax rate.

Capital Loss Tax Treatment

Realized capital losses can help reduce your tax bill in two main ways:

1. Offset capital gains:

Short-term losses can offset short-term gains and long-term losses offset long-term gains. If you have a net loss in one category, you can use it to offset a net gain in the other category.

2. Deduct against ordinary income:

If total capital losses exceed your gains, you can deduct up to $3,000 of those losses each year against ordinary income. Any remaining losses can be carried forward to future years until fully used.

When it comes to your investments, capital gains/losses only apply to assets held in taxable accounts such as brokerage accounts and revocable living trust accounts. Transactions in your tax-deferred and Roth accounts (such as IRA and 401k) are not reported as capital gains/losses.

Using Capital Gains in Tax Strategy

Before you sell any investments in a taxable account, think about the effect capital gains or losses will have on your tax bill. There are ways to use capital gains tax rates to your advantage – read on.

Take Advantage of 0% Capital Gains Tax Rates

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One benefit of paying capital gains taxes vs. ordinary income taxes is that capital gains are tax-free up to a certain level of income. That means it’s possible to sell shares of a stock and realize a gain but not owe any taxes on it.

For a couple filing jointly, the 0% capital gains tax rate extends up to $96,700 of taxable income. Taxable income is the amount of income subject to tax, after deductions and exemptions. Here’s an example:

Bob and Mary are a recently retired couple. They have a significant amount of retirement savings in a taxable brokerage account. Without income from work, they are now wondering how they can draw an income from their savings in a tax-efficient way.

Their only other income is from Bob’s Social Security benefits, totaling $40,000. To supplement their income, they decide to sell one of their stocks and realize $50,000 in long-term capital gains.

After applying the standard deduction, their taxable income remains under the $96,700 threshold.

Result: They can realize the $50,000 capital gain tax-free, creating the income they need without increasing their tax bill - an excellent outcome for them.

Now compare this to another approach: instead of realizing long-term capital gains to meet their income needs, Bob and Mary withdraw $100,000 from their IRAs.

Because IRA withdrawals are taxed as ordinary income, their total taxable income jumps significantly:

IRA withdrawals: $100,000

Social Security benefits: $40,000

Marginal tax bracket: 22%

That same $100,000 of income generates roughly $12,000 in federal taxes, plus potential state taxes.

Key takeaway: Long-term capital gains can be a powerful tool for retirees when planning where to draw income. Using the 0% tax bracket strategically can help you meet income needs while minimizing taxes.

Using the Step-Up in Cost Basis

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If you don’t qualify for the 0% capital gains tax rate and would prefer to defer any taxable gains, there is another option that will benefit your heirs.  

Investments in a taxable account receive a step-up in cost basis upon the account owner’s death. Here’s what that means in practice:

• The cost basis is reset to the investment’s fair market value at death.

• Any unrealized capital gains disappear. No tax is owed on the appreciation that occurred during the original owner’s lifetime.

• However, unrealized capital losses also disappear! (More on using capital losses later)

This can be useful to minimize the tax liability to your heirs. Even if you had a significant unrealized capital gain in a stock during your lifetime, your heir could sell the stock upon inheriting it and pay little to no capital gains. The sale will still be treated as long-term regardless of how long they’ve held it.

The step-up in cost basis applies at death – but it does not apply for assets gifted during your lifetime. If you gift shares of a stock to a relative while you are alive, the relative will retain your original cost basis on the stock along with any built-in gains.  

Donating Appreciated Stock to Charity

If you are charitably inclined, donating investments with large capital gains to charity can be one of the most tax-efficient ways to give. [Charitable Giving Strategies for Retirees: How to Maximize Your Tax Benefits]. Donating shares in-kind to charity has three significant benefits:

1. No capital gains taxes involved. It’s a direct gift of shares instead of selling the stock first then gifting cash.

2. You are able to give more to charity without capital gains tax carving into your donation.

3. Concentrated stock position adding risk to your portfolio? Donating stock in-kind allows you to reduce the risk of having too much of your portfolio in one stock.

   
   

There are IRS rules to be aware of when claiming your charitable tax deduction, so be sure to consult your CPA before taking action. 

Using Capital Losses to Strategically Lower your Taxes

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Let’s revisit capital losses. As mentioned earlier, realized capital losses can be used in two main ways:

1. To offset capital gains realized in the current year

2. Deductible against ordinary income up to $3,000 each year

   
   

We’ll look at both in more detail and how to use tax-loss harvesting to your advantage.

Offset Capital Gains with Losses

You can use capital losses to offset capital gains you have for the year.

A few things to keep in mind when netting losses against gains:

• Long-term and short-term get netted against each other first. A net loss in one category can then be netted against a gain in the other category.

• Capital losses get carried forward into future years if not used up. Capital gains are not carried forward and are taxed in the year of sale.

• Realizing losses can offset capital gains distributions from mutual funds. This is a helpful way to offset gains distributions since you have little control over the amount and timing of mutual funds distributing gains.

Deduct Against Ordinary Income

If you have more realized losses than gains, you can reduce ordinary income by up to $3,000 each year ($1,500 if married filing separately). The unused amount can be carried forward into future years to offset future realized gains or to reduce ordinary income.

The losses can be carried forward indefinitely until they’re used up. Remember that they retain their original character as short-term or long-term.

Tax-Loss Harvesting

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Tax-loss harvesting involves proactively selling investments with capital losses and then immediately re-investing in a similar (but not the same) investment.

The result is you start accumulating realized capital losses that may reduce future gains. If you have little to no gains that year, it carries forward to next year. This allows you to:

• Build a “bank” of capital losses to offset future gains.

• Reduce your tax bill in high-gain years.

• Stay invested without interrupting your long-term strategy.

  
  

You must avoid violating the wash-sale rule, which prohibits you from realizing a loss and buying the same or “substantially identical” security within 30 days before or after the sale. If you run afoul of the rule, the IRS will disallow your capital loss deduction.

For example, suppose you sell shares of an oil company at a loss. You could immediately buy an energy sector index fund holding dozens of oil companies to keep the exposure without triggering the wash-sale rule.

What is often missed: the wash-sale rule applies across all your accounts. This includes tax-deferred and Roth accounts. If you realize a capital loss in a taxable account but purchase the same stock in an IRA within 30 days, the loss will be disallowed under the wash-sale rule.

In Summary

Capital gains and losses play an underrated but powerful role in your tax picture. Understanding how they work can help minimize your tax bill and avoid nasty surprises.

As the year-end approaches, work with your financial advisor and CPA to discuss how capital gains and losses will affect your taxes. A few strategic moves now can meaningfully reduce your tax bill later.

 

Travis

Investment advisory services offered through Andrews Advisory Associates LLC, a registered investment advisor.  This blog is not meant to give investment advice. Before investing in any advisory product please carefully read any disclosure documents, including without limitation, the firm’s Form ADVs. The information herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions.