Selling an investment at a profit is one of the most satisfying moments in your financial life. But that satisfaction can quickly fade when you realize how much of your gain Uncle Sam expects to keep. Depending on your income and how long you held the asset, capital gains taxes can claim anywhere from 0% to 37% of your profits, a significant bite that can dramatically reduce your actual returns.
The good news? With proper planning, you can legally minimize, defer, or in some cases completely avoid capital gains taxes. The keyword here is planning. Once you’ve already sold your capital assets, your options shrink considerably. But if you think strategically before making a sale, you may be able to keep significantly more of your hard-earned investment gains.
This guide will help you learn how to reduce capital gains tax using eight strategies.
Looking for personalized capital gains tax planning advice? The team at ARQ Wealth is here to help. Call us at (480) 214-9572 for a free consultation with a tax professional on how to optimize your tax strategy.
How Capital Gains Taxes Work
Before diving into strategies, it’s important to understand the basics of capital gains taxation. A capital gain occurs when you sell an asset (stocks, bonds, mutual funds, real estate, or a business) for more than you paid for it. The profit you make is your capital gain, and it’s subject to taxation.
If you invest $10,000 into a stock and the stock doubles in value to $20,000, your net capital gain is $10,000 ($20,000 – $10,000 = $10,000). The Internal Revenue Service (IRS) divides capital gains into two categories based on how long you held the asset:
- Short-Term Capital Gains: Short-term gains (assets held for one year or less) are taxed at ordinary income tax rates, which can be as high as 37%.
- Long-Term Capital Gains: Profits from assets held for more than one year receive preferential tax treatment, with rates of 0%, 15%, or 20%, depending on your taxable income.
2026 Long-Term Capital Gains Tax Rates
Here are the long-term capital gains tax brackets for the 2026 tax year.
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
| 0% | Up to $49,450 | Up to $98,900 | Up to $66,200 |
| 15% | $49,451 – $545,500 | $98,901 – $613,700 | $66,201 – $579,600 |
| 20% | Over $545,500 | Over $613,700 | Over $579,600 |
Source: IRS Topic No. 409
1. Hold Investments for More Than One Year
The simplest and most powerful strategy to lower capital gains taxes is to hold your investments for at least one year and one day before selling. This allows your gains to qualify for the lower long-term capital gains rates instead of being taxed as ordinary income.
For example, let’s say you have a $50,000 gain on a stock you’re thinking of selling. If you’re in the 32% ordinary income bracket and sell before the one-year mark, you’ll owe $16,000 in federal taxes. But if you wait until you’ve held the stock for more than a year, and you qualify for the 15% long-term rate, you’ll owe just $7,500, a tax savings of $8,500.
ARQ Wealth Tip: If you’re approaching the one-year holding period, run the numbers before selling. Waiting a few extra weeks could save you thousands of dollars in taxes.
2. Use Tax-Loss Harvesting to Offset Gains
Tax-loss harvesting is a strategy where you sell investments that have declined in value to generate losses that offset capital gains. According to the IRS, if your capital losses exceed your capital gains in a given year, you can use up to $3,000 of the excess loss to reduce your ordinary income ($1,500 if married filing separately).
Here’s how it works in practice: If you sold Stock A for a $20,000 gain and Stock B for a $15,000 loss, you would only pay capital gains tax on the net gain of $5,000. If your losses exceed your gains, you can carry the unused losses forward to offset gains in future tax years indefinitely. Selling assets at a loss (for tax purposes) is a counterintuitive way to reduce your capital gains.
Learn more by reading our Guide to Tax Loss Harvesting.
3. Take Advantage of Lower-Income Years
Capital gains tax rates are based on your total taxable income. This creates an opportunity to time asset sales during years when your income is lower than usual. Some situations that might create lower-income years include:
- Transitioning to retirement (before Social Security benefits and pension income begin)
- Taking a career break or sabbatical
- Shifting from full-time to part-time work
- A slow business year for self-employed individuals
- Taking unpaid leave
- Planning to take withdrawals from your retirement plans or investment securities
For example, if a married couple’s taxable income normally puts them in the 15% capital gains bracket, but they have a year where their income drops below $96,700, they could sell appreciated investments and pay 0% capital gains tax on those gains.
ARQ Wealth Tip: Keep an annual tax forecast. If you anticipate a lower-income year ahead, you may want to plan your asset sales for that window to potentially lock in lower rates.
4. Maximize Tax-Advantaged Retirement Accounts
Investments held within tax-advantaged retirement accounts like 401(k)s and individual retirement accounts (IRAs) aren’t subject to capital gains taxes while they remain in the account. You can buy, sell, and rebalance these accounts without triggering any tax consequences (helping defer tax payments into the future).
For 2026, you can contribute:
- 401(k): Up to $24,500 ($32,500 if age 50 or older; $35,750 if age 60-63)
- Traditional or Roth IRA: Up to $7,500 ($8,600 if age 50 or older)
Traditional 401(k)s and IRAs are tax-deferred accounts, meaning you won’t pay taxes until you withdraw funds in retirement, at which point withdrawals are taxed as ordinary income rather than capital gains.
Roth IRAs and Roth 401(k)s offer an even better deal for capital gains: contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free. This means all investment growth, including what would have been capital gains, escapes taxation entirely.
Leveraging tax-advantaged accounts is a simple yet effective addition to your investment strategy that can help you lower capital gains taxes.
5. Donate Appreciated Assets to Charity
If you’re planning to make charitable contributions, donating appreciated investments instead of cash can provide a double tax benefit. According to IRS Publication 526, when you donate assets held for more than one year directly to a qualified charity, you avoid paying capital gains tax on the appreciation, while also receiving a charitable deduction for the full fair market value of the asset (up to 30% of your adjusted gross income).
Here’s an example: You bought stock for $5,000 that’s now worth $25,000. If you sold the stock and donated the cash, you’d owe a taxable gain on the $20,000 gain. But if you donate the stock directly, you pay no capital gains tax and can deduct the full $25,000 (subject to AGI limits).
6. Invest in Qualified Opportunity Zones
Qualified Opportunity Zones (QOZs) are economically distressed communities where investments may qualify for significant tax benefits. If you reinvest capital gains into a Qualified Opportunity Fund (QOF), you can:
- Defer capital gains taxes until the earlier of the sale of the QOF investment or December 31, 2026
- Reduce your original capital gains tax by 10% if you hold the QOF investment for at least five years (note: this benefit is limited for investments made after 2021, as the deferral period ends in 2026)
- Eliminate capital gains taxes on any appreciation of the QOF investment if you hold it for at least 10 years
This strategy can be particularly powerful for investors with large capital gains who are willing to invest in designated opportunity zones for the long term. Recent legislation (the One Big Beautiful Bill Act of 2025) has permanently extended the QOZ program with updated rules effective primarily after December 31, 2026, including rolling deferrals and enhanced incentives—consult current IRS guidance for details. However, it’s fairly complicated, so you may want to speak with a tax advisor prior to pursuing it.
7. Leverage the Step-Up in Basis at Death
While it may not be the most pleasant strategy to consider, the step-up in basis at death can be a powerful wealth transfer tool. When you pass away, your heirs receive your assets with a cost basis “stepped up” to the fair market value at the date of death.
Here’s what this means: If you purchased stock for $10,000 and it’s worth $100,000 when you die, your heirs’ new basis becomes $100,000. If they sell the stock for $100,000, they owe zero capital gains tax. The $90,000 of appreciation that occurred during your lifetime is never taxed.
This is why many financial advisors recommend holding highly appreciated assets rather than selling them before death. Of course, this must be balanced against other considerations like portfolio diversification and your own financial needs during your lifetime.
8. Gift Appreciated Assets to Family Members in Lower Tax Brackets
If you have family members in lower tax brackets, gifting appreciated assets to them before they sell could result in lower total taxes for your family. When you gift an asset, the recipient takes your original cost basis, but they pay capital gains tax based on their own tax bracket when they sell.
For 2026, you can give up to $19,000 per person without filing a gift tax return (this is the annual gift tax exclusion). A married couple can combine their exclusions to give up to $38,000 per recipient.
However, be aware of the “kiddie tax” rules. Unearned income over certain thresholds for children under 19 (or under 24 if full-time students) may be taxed at the parents’ rate, which could negate the benefit of this strategy.
Common Capital Gains Tax Mistakes to Avoid
Even with the best intentions, investors often make costly errors when it comes to capital gains taxes. Here are some pitfalls to watch out for:
- Selling Too Soon: Missing the long-term holding period by just a few days can result in significantly higher taxes. Always verify your holding period before selling.
- Ignoring Tax-Loss Harvesting Opportunities: Many investors let losses sit in their portfolios without realizing they could be used strategically to offset gains.
- Not Tracking Cost Basis Accurately: Poor record-keeping can lead to overpaying taxes. Keep detailed records of purchase prices, reinvested dividends, and capital improvements.
- Triggering Wash Sales: Accidentally buying back substantially identical securities within the 30-day window disqualifies your loss deduction.
- Failing to Plan Ahead: The best tax strategies require advance planning. Once you’ve sold an asset, your options are limited.
- Forgetting About Other Taxes: Reducing a taxable capital gain is nice, but it’s not the only tax you’re responsible for. Don’t forget about income taxes, other government taxes, state taxes, property tax, and others.
Reduce Your Capital Gains With the Team at ARQ Wealth
Capital gains taxes don’t have to take an outsized bite out of your investment returns. By understanding how capital gains are taxed and implementing the right strategies for your portfolio, you can legally keep more of what you’ve earned.
The key is proactive planning. Each of these strategies requires thinking ahead, and the best approach for you depends on your individual circumstances, including your income level, investment timeline, charitable inclinations, and estate planning goals.
And while these strategies are powerful tools, tax laws are complex and change frequently. What works for one investor may not work for another, and improper implementation can lead to costly mistakes or IRS scrutiny.
At ARQ Wealth, we help investors develop comprehensive tax optimization strategies tailored to their unique situations. A financial planner can help you analyze your portfolio, identify capital gains planning opportunities, and implement strategies that align with your broader financial goals to reduce your overall ordinary income tax.
Schedule a free consultation with ARQ Wealth today or call us at (480) 214-9572 to discuss reducing your capital gains tax burden.