How to Avoid Capital Gains Taxes Like the Wealthy

If you are a high-income earner, learning how to avoid paying capital gains tax could save you a significant amount of money in taxes.

When we think about taxes, the first things that typically come to mind are income taxes (deducted from our paychecks) and sales taxes (added to our bills when we shop). 

Often, these are direct and noticeable deductions. 

However, there is another tax that does not always get as much attention yet can significantly impact our finances: capital gains tax.

Capital gains tax is charged on the profit made from selling certain types of assets.

This could include stocks, bonds, real estate, and more. 

This guide walks you through 10 ways on how to avoid paying capital gains tax so you can keep more of your profits, reinvest them efficiently, and build long-term wealth with less tax drag.

Let’s dive into tax reduction strategies and maximize your after-tax returns.

1. Avoid Selling

While it might sound obvious, it is worth stating that you only pay capital gains tax when you sell an asset at a profit. 

If you are not selling, you are not paying. 

Keeping your investments intact means the IRS cannot touch the gains they generate. 

This approach requires patience and a tolerance for market fluctuations. Still, the benefit is that you defer paying taxes, possibly indefinitely. 

For many investors, particularly those building wealth over long periods, not rushing to sell can lead to substantial tax savings and allow the power of compounding to work its magic unhindered.

2. Hold Assets for the Long-Term

The amount you pay in capital gains tax can vary widely, depending on how long you have held the asset and your overall income:

• Short-term capital gains apply to assets sold within a year of purchase and are taxed at the same rates as your regular income, which can be anywhere from 10% to 37%.

• Long-term capital gains apply to assets held for more than a year before selling. These benefit from lower tax rates, which are 0%, 15%, or 20% based on your income level.

Keeping more of your gains means more capital to reinvest or use towards other financial objectives. 

Efficiently managing these taxes is important for optimizing your investment strategy and ensuring that your assets are working as hard as possible for you.

Holding your investments longer gives them more time to grow and reduces the taxes you owe when you eventually decide to sell.

3. Time Your Investment Gains

A smart investor keeps a keen eye on their tax rates, and so should you. 

Timing the sale of your investments to coincide with a period when your capital gains tax rate is lower can result in significant savings. 

Selling your investments when your income is lower means paying less capital gains tax. 

For example, you could put yourself in a lower tax bracket if you expect a drop in your income next year—maybe due to retirement or planning to work part-time. 

Tax rate	Single	Married filing jointly	Married filing separately	Head of household
0%	$0 to $47,025	$0 to $94,050	$0 to $47,025	$0 to $63,000
15%	$47,026 to $518,900	$94,051 to $583,750	$47,026 to $291,850	$63,001 to $551,350
20%	$518,901 or more	$583,751 or more	$291,851 or more

Suppose you are married and earn $300,000 this year and want to sell an investment with a $50,000 profit. You would pay 15% in capital gains taxes, which is $7,500.

But if you retire next year and your income drops to $80,000, your capital gains tax rate would be 0%. 

If you wait and sell, you would save $7,500 in taxes.

Planning your capital gains around your tax circumstances can help maximize your after-tax returns and reduce the chunk the IRS takes.

4. Use Tax-Advantaged Accounts to Shield Investments from Tax

For those who trade frequently or invest in options that typically come with high taxes, using tax-advantaged accounts like IRAs or 401(k)s can make a big difference.

These accounts allow you to buy and sell assets without triggering capital gains taxes with each transaction. 

This can be particularly beneficial if you are looking to actively manage your investments without the immediate tax consequences that typically come from frequent trading.

Tax-Deferred Accounts

Tax-deferred accounts, such as Traditional IRAs and 401(k)s, allow your investments to grow without being taxed annually. 

Taxes are only due when you withdraw the money, ideally during retirement when your income, and possibly your tax rate, is lower. 

This delay in taxation can significantly enhance the growth potential of your investments through compounding, as earnings can be reinvested to generate more profits.

Tax-Free Accounts

On the other hand, Roth IRAs and Roth 401(k)s are tax-free accounts, meaning you pay taxes on the money before it enters the account but not when you withdraw it during retirement. 

This can be highly beneficial, especially if you expect to be in a higher tax bracket in the future or if tax rates rise across the board.

When to Use Either

Choosing between tax-deferred and tax-free accounts often depends on your current tax rate versus your expected tax rate at retirement. 

A tax-deferred account can be beneficial if you anticipate being in a lower tax bracket when you retire. 

Conversely, if you expect to be in a higher tax bracket or foresee overall higher tax rates in the future, a tax-free account might be the better choice. 

Each type of account has its strategic uses, and selecting the right one can significantly impact the net growth of your retirement savings.

5. Invest for Appreciation Over Dividends

Investing with an eye toward appreciation rather than dividends can be a smart strategy for how to avoid paying capital gains tax and gain greater control over when and how you are taxed.

Appreciation refers to an increase in the value of an investment over time, which is only realized and taxed when you sell the asset. 

This means you have the power to decide the timing of your tax liability by choosing when to sell the asset. 

For instance, you might opt to sell during a year when your income is lower, benefiting from a lower tax rate. 

Or, you may implement a “Buy and Hold” or “Buy, Borrow, Die” strategy and never sell your investments to avoid taxes altogether.

In contrast, dividends and interest provide regular income from investments but are taxed in the year they are received, regardless of whether you reinvest them or use them as income. 

While dividends can provide a steady income stream, they lack the tax timing flexibility that comes with investments focused on appreciation.

Focusing on appreciation can significantly enhance long-term wealth as the compounding effect of gains continues to build without being diminished by annual taxes. 

This strategy is great for investors who are not in need of regular income from their investments.

Investing in assets with potential for appreciation, allows you to maximize your investment growth while strategically managing your tax burden, ensuring you keep more of what you earn.

6. Use Tax-loss Harvesting

Tax-loss harvesting is a financial strategy where you sell investments that have declined in value to offset the capital gains realized from other profitable investments. 

Simply put, investments that have not performed well might help reduce your tax liability.

After selling a losing investment, investors often buy a similar (not identical) asset to maintain their market position, while adhering to specific IRS rules to ensure the loss can be legally claimed.

How Tax-loss Harvesting Works

This approach allows investors to manage their tax implications more effectively. 

By strategically selling off losing investments, you can offset the capital gains that would otherwise increase your tax bill. 

This process of “harvesting” the losses can potentially reduce or even eliminate the taxes due on gains depending on the overall performance of your investments.

You can use these losses to counterbalance any capital gains you have accrued. 

Tax-Loss Harvesting Rules

Be careful not to violate the wash sale rule.

This prohibits you from claiming a tax deduction for a security sold at a loss if a substantially identical security is purchased within 30 days before or after the sale. 

Proper timing and selection of investments to sell for tax-loss harvesting require careful planning to ensure compliance and maximize tax benefits.

Importance of Accurate Cost Basis Calculations

Maintaining thorough records is necessary, especially if your investment purchases vary in price over time. 

These records are essential to calculate the correct cost basis, which is the original value of an asset for tax purposes, necessary for reporting to the IRS. 

7. Donate Appreciate Investments to Charity

Donating appreciated investments, such as stocks or real estate, to charity is another effective example of how to avoid paying capital gains tax.

When you donate an appreciated asset you have held for more than a year, you generally do not have to pay capital gains tax on the appreciation. 

Plus, you can often claim the asset’s full market value as a charitable deduction on your tax return.

This strategy saves you from paying capital gains tax and allows you to contribute significantly more to a cause you care about than if you had sold the asset and donated the after-tax proceeds. 

Charitable organizations typically sell these donated assets tax-free, which means your donation can have a greater impact. 

Always ensure the charity is qualified under IRS guidelines and properly document your donation to claim it on your taxes.

8. Avoid Real Estate Capital Gains Tax

Real estate sales can lead to huge tax bills, but there are ways to combat capital gains taxes. 

Two key methods are the Section 121 Exclusion for personal residences and the 1031 Exchange for rental properties.

Section 121 Exclusion (Personal Residence Exclusion)

The Section 121 Exclusion lets you keep profit from the sale of your home without paying taxes up to a specific limit. 

If you have lived in your house as your primary residence for at least two of the five years before you sell it, you can exclude up to $250,000 of the gain from your taxes if you are single or up to $500,000 if you are married and filing jointly. 

This is not a one-time deal; you can use this exclusion multiple times throughout your life, but generally no more often than once every two years.

1031 Exchange (Rental Properties)

A 1031 Exchange allows property investors to defer paying capital gains taxes on investment properties by reinvesting the proceeds from a sale into another property. 

The new property must be similar in type, and both properties must be used for business or investment purposes.

Here is how to make sure you do it right:

• Identify one or more replacement properties within 45 days of selling your original property.
• Complete the purchase of the new property within 180 days after selling the old one.
• Use a qualified intermediary to hold the proceeds from the sale; you cannot use the money for any other purpose during the exchange.

These strategies provide powerful ways to manage your tax liabilities effectively when selling real estate. 

9. Use Charitable Remainder Trust

A Charitable Remainder Trust (CRT) is a strategic financial tool that can help you reduce or defer capital gains taxes while supporting a charity of your choice. 

It allows you to avoid immediate capital gains tax, reduce your income tax, and convert a taxable asset into a long-term income stream while supporting charity.

Imagine a high-income earner who has owned a piece of real estate or stock for many years.

Over time, the value of that asset has significantly increased. 

If they sell it outright, they will owe a large amount in capital gains taxes, potentially reducing their profit.

Instead of selling it directly, they place the asset into a CRT.

The asset transfer is considered a charitable donation, also generating a charitable tax deduction for the taxpayer.

Thereafter, the trust sells the asset on their behalf, but because the CRT is a tax-exempt entity, no capital gains tax is due at the time of sale. 

The money from the sale is then reinvested in the trust, generating income.

That person then receives regular payments from the trust for life or a set number of years. 

These payments are taxed, but the original capital gain is deferred and spread out over time, reducing the overall tax burden.

At the end of the trust term, the remaining funds are donated to a charity of their choice.

When done right, a CRT is an incredibly effective way for high-income earners to protect their wealth, reduce taxes, and make a lasting impact.

10. Invest in Qualified Opportunity Fund

Investing in a Qualified Opportunity Fund (QOF) offers a unique opportunity to defer and potentially reduce capital gains taxes. 

This can be attractive for those looking to reinvest their capital gains in economically distressed communities, as designated by the Opportunity Zones Program.

When you invest a capital gain into a Qualified Opportunity Fund (QOF), you can defer paying taxes on that gain until the earlier of two dates: the date you sell your investment in the QOF or December 31, 2026.

This means the tax payment is postponed, allowing your investment to grow without the immediate tax burden.

Tax Benefits Over Time

After holding your QOF investment for at least 10 years, you can permanently exclude any additional gains earned on the QOF investment itself.

When you sell, you can increase your basis to the fair market value, making all growth after the original investment completely tax-free.

This 10-year exclusion makes QOFs a valuable long-term tool, especially for high-income earners seeking to avoid capital gains tax on future investment growth.

When paired with a strong, well-managed fund, this strategy allows you to defer today’s taxes and entirely eliminate future taxes on QOF gains.

The Bottom Line

Do not just hand over your investment profits, get strategic about how to avoid paying capital gains tax through legal methods that minimize what you owe.

Consult a qualified tax professional, especially for complex tax strategies, but take advantage of every avenue to keep more money working for you. 

With proper planning and patience, you can legally sidestep a hefty capital gains hit and keep growing your wealth.