how do I get zero capital gains tax

Capital Gains Tax: What It Is and How to Avoid Paying?

The tax paid by an individual on his profits after selling the investments is Capital gain tax. It depends on the period you hold your investment for. If you hold an investment for more than a year, you pay long-term capital gains tax. Likewise, if you hold an investment for less than a year, you pay short-term capital gains tax. 

  1. Capital gains taxes are paid only after the investments are sold.
  2. Capital gains taxes are applied to stocks, bonds, cryptocurrency, real estate, cars, or other tangible assets.
  3. Long-term capital gains are levied on the profits of selling the investment after holding them for one or more years.
  4. Short-term capital gains are levied on the profits of selling the investment within one year.
  5. The capital gain tax rate is 0%, 15%, or 20% levied on assets held for over a year. Short-term capital gain taxes are applied depending on the income tax bracket of the filer. The rates may be 10%,12%, 22%, 24%, 32%, 35% or even 37%.

Capital gains taxes are progressive. The profit after selling an investment is considered taxable income. Capital gains taxes are not levied on unsold or unrealized investments. 

What is a simple trick for avoiding capital gains tax?

1. Stocks

Taxes are not applied to the stocks as long as you hold them. The short-term capital gains tax and long-term capital gains tax are applied according to their holding time. The stocks held for less than a year are taxed more than those held for an extended period.

If you want to avoid or pay less capital gains on stock, try to make a strategy. 

  1. Think for the long-term: Consider holding your stocks for a longer term to avoid capital gains. The tax rate is lower for long-term capital gains than short-term capital gains. The flip side of holding the stocks for a longer term is that it can hamper your financial goals. 

  2. Utilize your capital losses to offset gains: The net capital gain can be used to pay off less capital gain. It is calculated by subtracting your capital gains from the capital losses. It is helpful when the market is volatile or bearish. You can carry forward your losses to balance the capital gains.

  3. Hold shares in tax-advantaged accounts: Hold your shares or dividends in a traditional IRS or Roth IRA. You can prevent yourself from paying capital gains taxes. As the amount remains in the 401k, you do not pay taxes on your investment profits, interest or dividends. 

  4. Robo-advisors: Robo-advisors suggest some strategies to avoid paying more taxes on capital gains. It sells losing investments to balance the taxes. 

2. Investment property

The capital gains tax applied on investment property is complex and depends on various factors like

  1. Your income tax bracket
  2. Your marital status
  3. Tenure of owing the house    
  4. Primary residence, secondary residence or investment property.

According to the norms designed in 2023, a taxable income of $44,625 or less is not subject to capital gain taxes. 

If you sell a house or property in one year or less, it is subject to short-term capital gains tax and is taxed according to ordinary income. It could be as high as 37%. On the other hand, property owned for more than a is subject to long-term capital gains, and the tax rate could be as low as 0% or as high as 20%, depending on the income tax bracket.

The IRS offers multiple ways to avoid or at least reduce capital gain taxes.

  1. Primary residence: You can sell your primary home and avoid paying capital gain taxes. If you are single, you can save on the profits of $250,000; if you are married and filing jointly, you can avoid taxes of $500,000. You must prove that the property was your primary residence and you lived there for over two years. 

  2. Rental or Additional property: You can avoid capital gains taxes on rental property by establishing it as your primary residence. You must move into the rental property for at least two years to convert it into a primary residence.

  3. 1031 exchange: This can help you when you sell one investment property and use the amount to buy a similar property.  

  4. Reducing mortgage interest: Homeowners can claim a tax deduction on the interest of their mortgage. It is essential in the early years when the interest payments are high and eventually decrease as the loan is paid down. 

3. Real estate: 

Investment in real estate can help you build wealth, so many investors opt for real estate investment. There are various ways to avoid or reduce capital gain taxes on real estate.

  1. Depreciation method: Many real estate investors use this strategy to reduce the burden of taxes. It is called a Modified Accelerated Cost Recovery System. This method depreciates the residential rental property and structural improvements over 27.5 years. The depreciation expenses are calculated as a net loss even if the property generates desirable cash flow.

  2. Borrow against your home: You can use your home as collateral to buy other property. This will add another property to your name by refinancing your home. For this reason, you must have substantial equity in the property against which you are refinancing.

  3. The opportunity zones: If you invest in economically disadvantaged or low-income communities the government designates, you can avoid capital gains taxes for five years. Any gain after 10 years is tax-free. 

4. Considering Capital gains taxes on collectibles

The profit generated by selling the collectibles is taxed at the maximum rate of 28%. The short-term capital gains from collectibles are taxed as ordinary income. According to the IRS, the collectible assets are:

  1. Artwork, rugs, and antiques
  2. Musical instruments and historical objects
  3. Stamps and coins
  4. Alcoholic beverages
  5. Precious metal or gem

The tax rate on collectibles is high because the government discourages the sale and purchase of collectibles. As precious metals are considered collectible, ETFs or mutual funds that invest in precious metals are also taxed at 28%.No claim of capital loss is allowed on the use of collectibles. 

Bottom Line

The capital gains taxes are applied to the profit after selling the investment. Capital gains taxes are levied on stocks, cryptocurrency, real estate, collectibles, etc. It is calculated according to the holding period of the investment. If the assets are held for less than one year, the short-term capital gains are applied to the investment. The rates of short-term capital gains may be 10%,12%, 22%, 24%, 32%, 35% or 37%.

On the other hand, the taxes levied on the investments held for more than a year are long-term capital gains. They are taxed according to the income tax bracket of the filer. To avoid capital gains tax or reduce the tax burden, it is advisable to hold the investment for a long period of time and take advantage of tax-advantaged accounts.  

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17 Nov, 2023

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