7 Smart Ways to Reduce Capital Gains Taxes and Build Wealth

The information in this article is up to date for tax year 2025 (returns filed in 2026).

There’s an old saying in financial circles: It’s not how much you make, it’s what you get to keep. When you make a dollar in the stock market, or virtually anywhere else, the IRS and other taxing authorities are waiting to claim their share. As you approach retirement, selling off investments to generate income may result in capital gains and the associated taxes. While this is a sound strategy for building wealth, it’s crucial to minimize your capital gains taxes wherever possible to keep more of your hard-earned money. Here are seven strategies to help you reduce your capital gains taxes as you move toward retirement.

1. Adopt a long-term holding strategy

One of the best ways to reduce capital gains taxes is by holding onto investments for the long term. Capital gains on assets held for more than a year are taxed at a lower rate than short-term capital gains. So, by holding your investments longer, you not only let your assets grow but also avoid paying the higher tax rates on short-term capital gains. This strategy can be particularly effective if you have decades before retirement, allowing your investments to compound while minimizing your tax liability.

2. Shed your losing investments to offset capital gains

Not every investment will be a winner, but the good news is you can offset your gains with the losses. This strategy, known as tax-loss harvesting, allows you to sell off investments that have decreased in value and use the losses to offset the gains you’ve made on other investments. It’s a smart way to reduce your overall tax bill. So, as you approach year-end, review your portfolio and consider selling any underperforming assets.

3. Time your big sales for low-income earning years

Timing the sale of appreciated assets is another great way to minimize capital gains taxes. If you’re retired or expect a lower income in a given year, you might choose to sell assets with significant capital gains during that time. The absence of earned income could put you in a lower tax bracket, reducing the capital gains tax you pay on the sale.

4. Take steps to reduce your taxable income

Reducing your taxable income can also help lower your capital gains taxes. Contributing to tax-advantaged accounts like IRAs or Health Savings Accounts (HSAs) can lower your overall income, which may, in turn, reduce the rate at which your capital gains are taxed. Whether you’re still working or already retired, focusing on tax-deferred contributions can be a powerful way to minimize your tax liability while still growing your retirement savings.

5. Donate appreciated assets and reap the tax benefits

Charitable giving can be an effective way to avoid capital gains taxes while also supporting causes you care about. Donating appreciated assets, such as stocks or mutual funds, allows you to avoid paying taxes on the capital gains of those assets. The charity receives the full value, and you get to take a charitable deduction. It’s a win-win for both your tax situation and your favorite charitable organizations.

6. Include stocks and mutual funds with large capital gains in your estate plan

If you’ve accumulated a substantial portfolio and expect more income than you need, you might consider including appreciated assets in your estate plan. When you pass on capital gains assets to heirs, they inherit them at a stepped-up cost basis. This means that their future gains will be calculated based on the current market value rather than the price you originally paid, significantly reducing the potential tax burden.

7. Move to a state with lower or no capital gains tax

Another strategy to minimize your capital gains taxes is relocating to a state with lower or no taxes on capital gains. Many states tax unearned income, including capital gains, so moving to a state like Florida or Texas, where there is no state income tax, could allow you to save significantly on your investment earnings. While this isn’t a simple decision for everyone, it can be a game-changer if you’re looking to reduce your overall tax burden.

Keep more of what you earn

Building a portfolio that can fund your retirement takes years of disciplined saving and smart investing. But when it comes time to sell off those assets, minimizing your capital gains taxes is just as important as growing your wealth. By following these strategies, you can keep more of your investment gains and enjoy the fruits of your labor without giving up too much to the taxman.

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Frequently Asked Questions

What is a capital gain, and how is it taxed?

A capital gain is the profit you make when you sell an asset like stocks, real estate, or crypto for more than you paid. In the U.S., capital gains are taxed as short-term (held for one year or less, taxed as ordinary income) or long-term (held for over a year, taxed at lower rates). Long-term rates are typically 0%, 15%, or 20%, depending on your income.

How long do I need to hold an asset to get long-term capital gains tax rates?

You must hold the investment for more than one year (12+ months) before selling. Even selling one day early could bump you into the higher short-term rate.

What counts as a “capital gain”?

A capital gain occurs when you sell an asset for more than you bought it. This includes:

Stocks and bonds
Real estate (other than your primary home)
Cryptocurrency
Business assets
Collectibles like art or jewelry

How can I avoid or reduce capital gains taxes?

Common strategies include:

Holding investments for over one year
Offsetting gains with capital losses (tax-loss harvesting)
Contributing to retirement accounts
Using a 1031 exchange for real estate
Investing in Opportunity Zones
Gifting or donating appreciated assets
Strategically timing when you sell

What is a 1031 exchange?

A 1031 exchange lets real estate investors defer capital gains tax by selling one investment property and using the proceeds to purchase another “like-kind” property within IRS deadlines.

Do I owe capital gains tax on my home sale?

Maybe, but you may qualify for the home sale exclusion. If you owned and lived in the home for at least two of the past five years, you can typically exclude up to $250,000 (single) or $500,000 (married filing jointly) of profit from taxes.

Can tax-loss harvesting really save me money?

Yes. Tax-loss harvesting allows you to sell investments at a loss to offset capital gains or up to $3,000 of ordinary income per year. This can lower your overall tax bill, especially in high-volatility years.

Do I still owe capital gains tax if I reinvest my profits?

Reinvesting doesn’t eliminate the tax by itself. Selling an investment at a profit generally triggers tax unless you use a special strategy like a 1031 exchange or invest in Qualified Opportunity Funds.

What if I receive a capital gain from an inheritance?

Inherited assets usually get a step-up in basis, meaning the cost basis resets to the asset’s value on the date the original owner passed. This can significantly reduce or eliminate capital gains tax when you sell.

Can using tax software help me reduce capital gains taxes?

Yes. Quality tax software like ezTaxReturn can automatically apply the right tax rules, identify potential deductions and credits, and help ensure you’re paying only what you owe.