When it comes to investing, the true measure of success isn’t just what you earn—it’s how much you keep after taxes. That’s why it’s crucial to plan ahead and take steps to minimize taxes on your realized investment gains. Here are several strategies to help you reduce the impact of long-term capital gains taxes.

Focus on Long-Term Investments

Capital gains taxes differ depending on how long you hold an investment. Long-term capital gains, which come from selling investments held for more than a year, are taxed at a lower rate compared to short-term gains. Long-term gains are taxed at a maximum rate of 20%, while short-term gains are taxed as ordinary income, which can be much higher.

By holding onto investments for longer than a year, you can take advantage of these lower tax rates and retain more of your profits. Therefore, it’s wise to avoid selling well-performing stocks within a short period unless necessary.

Maximize Tax-Advantaged Accounts

One of the most effective ways to minimize taxes is to maximize contributions to tax-advantaged accounts before considering taxable accounts. For 2023, individuals can contribute up to $22,500 to a 401(k), with an increase to $23,000 for 2024. For traditional IRAs, the contribution limit for 2023 is $6,500, rising to $7,000 in 2024.

Not only do contributions to these accounts grow tax-deferred, but capital gains realized within them are not subject to capital gains tax. This is especially beneficial if you’re frequently buying and selling assets to maintain your portfolio’s balance.

Take Advantage of Tax Bracket Changes

While capital gains tax rates may stay the same, tax brackets—the income ranges that determine the rate you pay—are often adjusted for inflation. For 2023, the tax brackets for long-term capital gains were increased, meaning you can earn more before moving into the 15% or 20% tax brackets. For example, if you’re a single filer with taxable income of $44,625 or less, or a married couple with $89,250 or less, you won’t owe any capital gains tax.

It’s important to monitor changes in the tax brackets, especially if your income fluctuates from year to year. If that’s the case, you might consider realizing gains during a year when your income is lower to take advantage of a lower tax bracket.

Harvest Losses to Offset Gains

Tax-loss harvesting is a strategy where you sell investments that have declined in value to offset gains realized elsewhere in your portfolio. This can reduce your overall tax liability. For example, you can use up to $3,000 of realized losses to offset other taxable income. Any excess losses can be carried forward to future years, allowing you to offset future gains.

Consider “No Sale, No Taxes” Strategy

If you’re in a higher tax bracket, it may make sense to hold onto promising investments and transfer them to heirs upon your death. By not selling the investments during your lifetime, you avoid capital gains taxes altogether. Additionally, heirs benefit from a “step-up in basis” on inherited assets, which means the tax basis is reset to the current market value at the time of inheritance. This can significantly reduce the capital gains taxes when the assets are eventually sold.

Donate Appreciated Assets to Charity

If you’re charitably inclined, donating appreciated assets—such as stocks or mutual funds—can provide a double tax benefit. Not only can you claim a charitable deduction for the asset’s market value, but you also avoid paying capital gains taxes on the appreciation. For more flexibility, consider using a donor-advised fund (DAF), which allows you to contribute assets and take the deduction now, while deciding which charities to support later.

Invest in Opportunity Zones

If you’re looking to reinvest your realized gains, consider investing in an opportunity zone. These are economically distressed areas in the U.S. where the government offers tax incentives to encourage investment. By rolling over your capital gains into a qualified opportunity zone fund, you can avoid paying capital gains tax. However, be mindful that opportunity zone investments typically require you to hold them for at least 10 years to fully benefit from the tax advantages.

Final Thoughts

Long-term capital gains taxes are an important factor to consider when planning your investments. By using strategies like holding investments for longer periods, maximizing tax-advantaged accounts, and taking advantage of tax-loss harvesting and opportunity zones, you can minimize the tax impact and keep more of your investment gains. Work closely with your financial and tax advisors to develop a strategy that aligns with your financial goals and reduces your tax burden over time.