Crypto Tax Loopholes the IRS Doesn’t Want You to Know
Capital gains got you down? The system’s rigged—but these under-the-radar strategies flip the script.
Harvesting Losses Like a Pro
Offset gains by dumping losers before year-end. The IRS hates this one simple trick.
Going Long for the Win
Hold assets over a year and watch tax rates plummet from 37% to 20%. Patience pays—literally.
DeFi’s Dirty Little Secret
‘Lost’ wallets and ‘failed’ transactions suddenly make taxable gains disappear. Wink wink.
Bonus Cynical Jab: Remember when banks got trillion-dollar bailouts? Yeah, they’re not paying capital gains either.
The 10 Game-Changing Secrets to Lowering Your Capital Gains Tax Rates
Here are the key strategies that can help minimize capital gains tax liabilities:
- Secret 1: Master the Long-Term Hold
- Secret 2: Harness the Power of Tax-Loss Harvesting
- Secret 3: Maximize Tax-Advantaged Accounts
- Secret 4: Unlock the 0% Capital Gains Rate
- Secret 5: Leverage Your Primary Residence Exclusion
- Secret 6: Explore Strategic Real Estate Deferrals
- Secret 7: Utilize Charitable Giving Strategies
- Secret 8: Plan for Wealth Transfer with Gifting & Estate Strategies
- Secret 9: Spread Out Gains with Installment Sales
- Secret 10: Capitalize on Qualified Small Business Stock (QSBS)
Unveiling Each Capital Gains Tax Secret
This section provides a detailed explanation of each strategy, offering practical insights and considerations.
Secret 1: Master the Long-Term Hold
The most fundamental distinction in capital gains taxation lies in the holding period of an asset. If an asset is held for one year or less, any profit from its sale is classified as a short-term capital gain. Conversely, if an asset is held for more than one year, the profit is considered a long-term capital gain. This seemingly simple time difference carries profound financial implications.
The Internal Revenue Service (IRS) provides a clear incentive for investors to adopt a “buy and hold” approach. Long-term capital gains are taxed at significantly lower, preferential rates—typically 0%, 15%, or 20%—depending on an individual’s taxable income and filing status. In stark contrast, short-term capital gains are taxed at the same rates as ordinary income, which can range from 10% to 37%. This substantial difference in tax rates underscores the financial advantage of patience in investing. For instance, a $1,000 gain for a single individual with $100,000 taxable income in 2025 WOULD incur $220 in tax if short-term, but only $150 if long-term.
This policy reflects a deliberate governmental encouragement of long-term investment, aiming to foster capital formation, market stability, and patient capital allocation, rather than speculative, short-term trading. For investors, recognizing this underlying purpose behind the tax structure reinforces the financial wisdom of a long-term strategy, aligning personal profit maximization with broader economic goals. Therefore, a key piece of actionable advice is to always aim to hold appreciating assets for more than one year if tax efficiency is a primary objective. Even delaying a sale by just a few days to cross the one-year mark can result in a substantial reduction in the tax bill.
Secret 2: Harness the Power of Tax-Loss Harvesting
Tax-loss harvesting is a proactive strategy that involves intentionally selling investments at a loss to offset realized capital gains. This technique is a crucial component of year-end portfolio management.
The process works by “netting” capital gains against capital losses. For example, if an investor realizes a $10,000 gain on one asset but incurs a $4,000 loss on another, their net capital gain for tax purposes is reduced to $6,000. This direct reduction lowers the amount of profit subject to capital gains tax.
A significant benefit of tax-loss harvesting is the ability to carry over losses. If an investor’s capital losses exceed their capital gains for the year, they can use up to $3,000 of those net losses to offset ordinary income annually. Any remaining excess losses can be carried forward indefinitely to offset future capital gains, or up to $3,000 against ordinary income in subsequent years. This means that current market downturns or underperforming assets can provide valuable tax benefits for future tax years, effectively smoothing out tax liabilities over time. For instance, a $20,000 stock loss can cancel out a $5,000 gain, with the remaining $15,000 loss available to offset income over the next four years at $3,000 per year.
A critical consideration when employing this strategy is the IRS wash sale rule. This rule disallows a loss if an investor sells a security and then buys a “substantially identical” security within 30 days before or after the sale. This regulation prevents investors from artificially generating tax losses without genuinely altering their investment position. The ability to carry forward losses means that even in challenging market conditions, investors acquire a valuable tool to reduce future tax burdens. This transforms perceived “losses” into strategic tax assets, making tax-loss harvesting a proactive measure to optimize long-term portfolio returns by minimizing the drag of taxes.
Secret 3: Maximize Tax-Advantaged Accounts
Investing within specific retirement accounts, such as 401(k)s and Individual Retirement Accounts (IRAs), offers a powerful mechanism to grow investments and realize gains without incurring immediate capital gains taxes. These accounts are designed to encourage long-term savings by providing significant tax benefits.
There are two primary types of tax-advantaged accounts:
- Traditional Accounts (e.g., Traditional IRA, 401(k)): Contributions to these accounts are often tax-deductible, and investments grow on a tax-deferred basis. This means that capital gains and other investment income are not taxed annually. Taxes are only paid upon withdrawal in retirement, typically as ordinary income.
- Roth Accounts (e.g., Roth IRA, Roth 401(k)): Contributions to Roth accounts are made with after-tax dollars, meaning they are not tax-deductible. However, the significant benefit is that investments grow tax-free, and qualified withdrawals in retirement are also entirely tax-free. This implies that all capital gains realized within a Roth account are never subjected to taxation, offering an unparalleled advantage. For example, a $6,000 investment in a Roth IRA that grows to $30,000 can be withdrawn entirely tax-free in retirement, effectively avoiding capital gains taxes on the $24,000 of growth.
The true strength of tax-advantaged accounts, particularly Roth accounts, extends beyond merely avoiding immediate capital gains tax. It lies in allowing gains to compound tax-free over decades. This means every dollar of profit is immediately reinvested without being diminished by taxes, leading to exponential growth over time. The implication is that even modest, consistent contributions to these accounts can lead to substantial wealth accumulation, potentially far exceeding what would be possible in a taxable brokerage account, due to the uninterrupted compounding effect. This makes tax-advantaged accounts a cornerstone of long-term financial planning and a profound strategy for retirement wealth.
Secret 4: Unlock the 0% Capital Gains Rate
A lesser-known but highly effective strategy involves leveraging the IRS provision that allows a portion of capital gains to be taxed at a 0% rate. This applies if an individual’s overall taxable income, which includes wages, interest, and short-term capital gains, falls below specific thresholds.
For the 2025 tax year, the income limit to qualify for the 0% long-term capital gains rate is $96,700 for a married couple filing jointly. For single filers, this threshold is up to $48,350. This means that even with capital gains, an individual could owe nothing in federal taxes if their income is sufficiently low.
Several strategies can help individuals qualify for or maximize this 0% rate:
- Utilize Deductions: Both itemized deductions (such as charitable donations, mortgage interest, and medical costs) and the standard deduction can effectively lower an individual’s taxable income. By reducing adjusted gross income (AGI), these deductions can help keep an individual within the 0% capital gains bracket. For instance, a married couple filing jointly could have an AGI of up to $116,950 and still pay zero federal capital gains tax after accounting for the standard deduction.
- Spread Out Gains: Selling a large number of appreciated assets in a single year can inadvertently push an individual’s income above the 0% threshold. A more strategic approach involves spreading asset sales over multiple years. This allows individuals to recognize gains incrementally, keeping their annual taxable gains within the 0% bracket. This method is particularly effective for stock sales, where the timing of transactions is largely within the investor’s control.
The 0% capital gains rate highlights that effective tax planning encompasses more than just individual investment sales; it requires a holistic approach to income management. For individuals experiencing fluctuating income, or those nearing retirement where their income might decrease, strategically timing asset sales to coincide with lower-income years can be exceptionally beneficial. This approach necessitates multi-year financial forecasting and a coordinated strategy between investment decisions and overall income management. It represents a nuanced way to leverage the progressive nature of the tax system, transforming a potential tax liability into a tax-free event for a segment of the population.
Secret 5: Leverage Your Primary Residence Exclusion
One of the most significant and widely available capital gains tax breaks pertains to the sale of an individual’s main home. When a primary residence is sold, taxpayers may be able to exclude a substantial portion of their capital gains from taxation: up to $250,000 for single filers and $500,000 for married couples filing jointly.
To qualify for this exclusion, specific requirements must be met. The homeowner must have owned and lived in the property as their main home for at least two out of the five years preceding the date of the sale. This “use test” ensures that the property genuinely served as a primary residence. For example, a homeowner selling a house for $1.2 million that was originally purchased for $600,000 can exclude $500,000 in capital gains if married, significantly reducing their tax bill to nearly zero.
It is important to note that capital losses from the sale of a personal residence are generally not deductible. However, qualifying expenses for home improvements can be added to the property’s cost basis, which further reduces the amount of taxable capital gain upon sale.
The primary residence exclusion is often taken for granted, yet it represents one of the most impactful capital gains tax benefits available. Its strategic power lies not just in its existence, but in how it can be utilized. Understanding the “2 out of 5 years” rule, for instance, allows homeowners to potentially cycle through homes, realizing tax-free gains multiple times over a lifetime, rather than limiting this benefit to a single transaction. This highlights that homeownership, beyond its personal and investment benefits, also functions as a powerful, recurring tax-shelter mechanism, particularly for individuals who frequently relocate or downsize.
Secret 6: Explore Strategic Real Estate Deferrals
For investors in real estate, a suite of sophisticated strategies exists to defer or even eliminate capital gains taxes, thereby preserving capital for reinvestment and maximizing long-term wealth accumulation.
These real estate tax strategies FORM a sophisticated and interconnected ecosystem. They are not isolated tools but can be strategically chained together—for example, executing a 1031 exchange into a DST, and then later transitioning the DST interest into a 721 UPREIT. This interconnectedness allows for continuous tax deferral, enhanced diversification, and the potential for passive income, facilitating a transition from active property management to a more liquid, hands-off investment approach. This complex interplay enables long-term wealth preservation and growth, even across generations through the step-up in basis for OP units.
Secret 7: Utilize Charitable Giving Strategies
For individuals with philanthropic inclinations, integrating charitable giving into their financial planning offers powerful and often underutilized avenues to reduce capital gains tax liabilities. These strategies provide a “double benefit”: supporting a cause while simultaneously optimizing tax outcomes.
These charitable giving strategies demonstrate that philanthropy can be a powerful lever in tax planning. By donating appreciated assets, investors can achieve the dual objective of avoiding capital gains tax on the appreciation and receiving a charitable deduction. This means that for individuals who are already inclined to support charitable causes, integrating this giving into their overall financial plan can significantly reduce their tax burden, effectively transforming a tax obligation into a societal benefit.
Secret 8: Plan for Wealth Transfer with Gifting & Estate Strategies
Strategic wealth transfer, particularly through gifting and estate planning, offers powerful, long-term approaches to minimize capital gains taxes, often across generations.
Upstream gifting requires meticulous planning, a high degree of trust within the family, and careful consideration of the older recipient’s financial situation, potential creditor claims, and their own estate tax exemption usage. The step-up in basis is a powerful, albeit passive, tax benefit. Upstream gifting transforms this passive benefit into an active, multi-generational tax-planning strategy. This indicates that truly optimizing capital gains taxes often necessitates a long-term, family-wide perspective, considering how assets are held and transferred across generations. It is about leveraging the tax code to preserve and grow family wealth over decades, rather than merely minimizing taxes on a single transaction. The temporary increase in the lifetime exemption until the end of 2025 creates a timely window for exploring such sophisticated strategies.
Secret 9: Spread Out Gains with Installment Sales
An installment sale is a valuable strategy that allows individuals to spread the recognition of a capital gain over multiple tax years, rather than incurring a large tax bill all at once from a lump sum payment. This method is particularly useful for substantial asset sales, such as real estate or a business.
In an installment sale, the buyer makes payments over time, often through seller financing, and the seller recognizes the gain proportionally as they receive these payments. This approach can keep the seller’s annual taxable income lower, potentially allowing them to remain in lower tax brackets for those years, thereby reducing their overall tax burden. For example, a seller financing the sale of a $3 million rental property to a buyer over 10 years can significantly reduce their yearly taxable income while collecting principal and interest payments.
However, it is crucial to distinguish between legitimate installment sales and a specific, highly problematic variant known as “monetized installment sales.” While traditional installment sales are a recognized and legitimate tax deferral tool, the IRS has explicitly flagged “monetized installment sales” as potentially abusive tax strategies and has classified them as “listed transactions”. These schemes attempt to provide the seller with immediate access to the full value of the sale proceeds while still claiming the tax benefits of an installment sale. The IRS views this as “constructive receipt” of income, meaning that if a taxpayer has access to or control over the proceeds—even indirectly—they are considered to have received the income, making it taxable in the year of the transaction.
Engaging in monetized installment sales carries significant regulatory risk, including potential audits, substantial penalties (up to 40% non-economic substance penalty), and the disallowance of the deferral. The aggressive stance of the IRS against monetized installment sales underscores a broader principle in tax law: the paramount importance of “economic substance.” If a transaction’s primary purpose appears to be tax avoidance rather than a legitimate business or investment objective, it is highly likely to face intense scrutiny. This means that while genuine deferral is a valid goal, attempts to gain immediate liquidity without triggering a taxable event are red flags. Investors should always question strategies that seem “too good to be true” and prioritize those with clear economic rationale beyond just tax savings, adhering to the spirit, not just the letter, of tax law.
Secret 10: Capitalize on Qualified Small Business Stock (QSBS) Exemption
The Qualified Small Business Stock (QSBS) exemption, governed by Section 1202 of the Internal Revenue Code, is a highly specialized yet incredibly powerful tax break. It allows non-corporate taxpayers to exclude a substantial portion, often up to 100%, of capital gains realized from the sale of eligible QSBS.
To qualify for this significant exemption, several stringent requirements must be met at both the corporate and shareholder levels:
- Issuer Requirements: The stock must be issued by a domestic C-corporation. The corporation’s gross assets must not exceed $50 million at the time of stock issuance. Additionally, at least 80% of the corporation’s assets must be actively used in a qualified trade or business, with certain sectors (e.g., hospitality, personal services, finance, farming, mining) explicitly excluded.
- Shareholder Requirements: The investor must be a non-corporate taxpayer (an individual). The stock must have been acquired at its original issue, meaning it cannot be purchased on the secondary market. The stock must also be held for more than five years to qualify for the exemption.
- Stock Acquisition Date: The percentage of gain exclusion depends on when the QSBS was acquired. The coveted 100% exclusion generally applies to QSBS acquired after September 27, 2010. Earlier acquisitions may qualify for a 50% or 75% exclusion.
The amount of excludable gain is capped at the greater of $10 million (cumulatively for all sales of that corporation’s QSBS by the taxpayer) or 10 times the taxpayer’s aggregate adjusted basis in the QSBS sold during the taxable year. For example, if an investor’s basis is $50,000 and the gain is $11,950,000, they could exclude $10 million, as it’s greater than 10x basis ($500,000).
Furthermore, Section 1045 allows for a rollover of gains: if the original QSBS (held for at least six months) is sold, the gain can be deferred by reinvesting the proceeds into another QSBS within 60 days.
The QSBS exemption, despite its specialized nature, is an incredibly powerful tax break. Its stringent requirements regarding company type, asset size, and holding period reveal a clear governmental policy objective: to incentivize and reward investment in small, growing domestic businesses. This demonstrates how tax policy can be a direct driver of economic development and innovation. For investors, aligning investment decisions with these specific policy incentives can unlock disproportionately large tax savings, rewarding those who take on the inherent risks of early-stage business investment. It serves as a prime illustration of how understanding the underlying purpose behind a tax rule can lead to significant financial advantage.
Understanding Capital Gains: The Essential Foundations
To effectively implement the strategies discussed, it is crucial to grasp the foundational concepts of capital gains taxation.
What are Capital Gains?
A capital gain is the financial profit realized from the sale of a “capital asset”. Capital assets encompass a wide range of property, including financial instruments like stocks, bonds, mutual funds, and exchange-traded funds (ETFs), as well as physical assets such as real estate, businesses, digital assets (e.g., cryptocurrencies, NFTs), jewelry, and coin collections.
The calculation of a capital gain is typically straightforward: it is the difference between the amount for which the asset is sold and its “basis”. The basis is usually what the investor paid for the asset, plus any additional qualifying expenses incurred in making or maintaining the investment. For instance, improvements to a home can increase its cost basis, reducing the taxable gain upon sale.
It is important to differentiate between “realized” and “unrealized” gains. Gains are only taxable when they are “realized,” meaning when the asset is actually sold. Any appreciation in an asset’s value that exists only on paper, before a sale, is considered an “unrealized” gain and is not subject to tax.
The definition of capital gain hinges entirely on the concept of “basis”. While seemingly simple, accurately tracking basis, especially when factoring in additional expenses or for assets acquired through gifts or inheritance, is critical. This means that meticulous record-keeping is not merely a compliance chore but a direct determinant of the taxable gain. Failing to track qualifying expenses can lead to overpaying taxes, making accurate basis tracking a foundational, yet often underestimated, element in minimizing tax liabilities.
Short-Term vs. Long-Term: Why the Distinction Matters
The distinction between short-term and long-term capital gains is paramount due to the significant difference in their tax treatment. The dividing line is a one-year holding period:
- Short-Term Capital Gains: Apply to profits from assets held for one year or less. These gains are taxed at the same rates as ordinary income, which can be considerably higher, ranging from 10% to 37%.
- Long-Term Capital Gains: Apply to profits from assets held for more than one year. These gains receive preferential, lower tax rates of 0%, 15%, or 20%.
This difference represents a deliberate incentive from the government to encourage “buy and hold” investing. The one-year holding period acts as a significant “tax cliff.” A gain realized at 364 days could be taxed at a marginal rate of up to 37%, while the exact same gain realized at 366 days could be taxed at a substantially lower rate, potentially 0%, 15%, or 20%. This highlights that investors should be acutely aware of their holding periods, especially for assets nearing the one-year mark, and strategically delay sales by a few days if it means transitioning from a short-term to a long-term gain. This seemingly minor timing decision can have a disproportionately large impact on tax liability.
How Capital Gains are Calculated
The calculation of capital gains involves a netting process to determine the final taxable amount. All capital gains and losses for the year are combined to arrive at a “net gain or loss”. This process involves several steps:
If total capital losses exceed total capital gains, individuals can deduct up to $3,000 of those net losses against their ordinary income annually. Any excess losses beyond $3,000 can be carried forward indefinitely to offset future capital gains, or up to $3,000 against ordinary income in subsequent years.
When selling shares acquired at different times, the choice of cost basis method can impact the declared gain. Common methods include First-In, First-Out (FIFO), Last-In, First-Out (LIFO), average cost, or specific share identification. Selecting the most advantageous method can further optimize tax outcomes.
The ability to net capital gains and losses, and especially to carry forward losses, transforms investment losses from pure financial setbacks into valuable tax assets. This means that even in down markets, investors possess a tool to reduce future tax burdens, making “tax-loss harvesting” not just a reactive measure but a proactive strategy to optimize long-term portfolio returns by minimizing tax drag.
Current Capital Gains Tax Rates (2024 & 2025)
Understanding the specific tax rates and income thresholds is essential for effective capital gains planning. The rates vary based on whether the gain is short-term or long-term, the taxpayer’s overall income, and their filing status.
2024 & 2025 Short-Term Capital Gains Tax Rates (Ordinary Income Brackets)Short-term capital gains are taxed at the same rates as ordinary income. The following tables illustrate the federal income tax brackets for 2024 and 2025, which apply to short-term gains.
Note: For Married Filing Separately, income thresholds are generally half of Married Filing Jointly.
2024 & 2025 Long-Term Capital Gains Tax Rates (0%, 15%, 20%)Long-term capital gains are subject to preferential rates, as shown below.
Note: For Married Filing Separately, income thresholds are generally half of Married Filing Jointly.
Special Capital Gains Tax Rates:Beyond the standard short-term and long-term rates, certain assets are subject to specific tax treatments:
- Collectibles: Long-term gains from the sale of collectibles, such as art, antiques, jewelry, precious metals, and stamp collections, are taxed at a maximum rate of 28%. Short-term gains on collectibles are taxed as ordinary income.
- Depreciation Recapture: When depreciable real estate is sold, any gain attributable to previously claimed depreciation deductions is “recaptured” and taxed at a special rate of 25%. The remaining gain is taxed at standard long-term capital gains rates.
- Net Investment Income Tax (NIIT): High-income earners may face an additional 3.8% Net Investment Income Tax on their investment income, including capital gains. This tax applies if an individual’s modified adjusted gross income (MAGI) exceeds certain thresholds, such as $200,000 for single filers or $250,000 for married couples filing jointly in 2025.
The existence of different rates for short-term versus long-term gains, special rates for collectibles and depreciation recapture, and the additional NIIT demonstrates that capital gains taxation is not a monolithic concept. It is a layered system with nuances based on asset type, holding period, and overall income. This complexity highlights that effective capital gains planning requires a detailed understanding of these various layers and how they interact, rather than a simplistic, one-size-fits-all approach. It underscores the value of professional advice to navigate this intricate landscape.
Important Considerations & Cautions
While the strategies outlined above offer significant opportunities for tax optimization, it is crucial to be aware of certain rules and potential pitfalls.
The Wash Sale Rule
The IRS wash sale rule is designed to prevent taxpayers from artificially generating tax losses. This rule disallows a loss if an individual sells a security and then buys a “substantially identical” security within 30 days before or after the sale. The implication is that while tax-loss harvesting can be a powerful tool, investors must be mindful of this rule to ensure the claimed loss is legitimate for tax purposes. It prevents individuals from maintaining their investment position while claiming a tax benefit.
Depreciation Recapture
For real estate investors, depreciation is a valuable deduction that reduces taxable income annually. However, this benefit comes with a deferred tax liability. When a depreciated real estate asset is sold, the portion of the gain equal to the depreciation previously claimed is “recaptured” and subjected to a special tax rate of 25%. This means that while depreciation provides annual tax savings, it creates a future tax obligation that must be factored into the overall investment and tax planning strategy. Understanding this mechanism is crucial for accurate financial projections and avoiding unexpected tax bills upon sale.
Monetized Installment Sales: A Red Flag
As previously discussed, while traditional installment sales are legitimate tax deferral strategies, “monetized installment sales” have been explicitly identified by the IRS as potentially abusive tax schemes. These transactions are now classified as “listed transactions” and have appeared on the IRS’s “Dirty Dozen” list.
The Core issue with monetized installment sales is that they attempt to provide the seller with immediate access to the full cash proceeds from a sale while still claiming to defer the recognition of the capital gain. The IRS views this as “constructive receipt” of income, meaning that if a taxpayer has control over or access to the proceeds, even indirectly, the income is considered received and immediately taxable.
Engaging in these schemes carries significant regulatory risk. Taxpayers who participate in monetized installment sales may face audits, substantial penalties (including a 40% non-economic substance penalty), and the disallowance of the claimed deferral. The aggressive stance taken by the IRS against monetized installment sales underscores a fundamental principle in tax law: the importance of “economic substance.” If a transaction’s primary purpose appears to be solely tax avoidance rather than a legitimate business or investment objective, it is highly likely to draw scrutiny. This highlights that investors should always approach strategies that seem “too good to be true” with extreme caution and prioritize those with clear economic rationale beyond just tax savings.
The Importance of Professional Advice
Capital gains tax planning can be highly complex, and individual financial circumstances vary greatly. The strategies discussed in this guide, particularly the more advanced ones involving real estate, trusts, or business stock, require a DEEP understanding of tax law and meticulous execution. Attempting to implement complex tax strategies without expert guidance can lead to errors, non-compliance, and potentially significant penalties. Therefore, it is strongly recommended that individuals consult with a qualified financial advisor, tax professional, or estate planning attorney. These professionals can provide personalized advice tailored to specific situations, ensure compliance with evolving IRS rules, and help optimize tax outcomes while aligning with broader financial goals.
Frequently Asked Questions (FAQ)
Q1: What is the difference between a capital gain and ordinary income?
A1: Capital gains are profits derived from the sale of assets like stocks, bonds, or real estate. They are taxed at specific capital gains rates, which are generally lower for long-term gains. Ordinary income, on the other hand, includes wages, salaries, interest, and short-term capital gains, and is taxed at generally higher, progressive income tax rates.
Q2: Can I use capital losses to reduce my ordinary income?
A2: Yes. If your total capital losses for the year exceed your total capital gains, you can deduct up to $3,000 of those net losses against your ordinary income each year. Any excess losses that are not used in the current year can be carried forward indefinitely to offset capital gains in future years, or up to $3,000 against ordinary income in subsequent years.
Q3: Are capital gains taxes different for real estate vs. stocks?
A3: While both real estate and stocks are subject to capital gains tax, real estate has specific additional rules. These include the primary residence exclusion, which allows homeowners to exclude up to $250,000 (single) or $500,000 (married) of gain from the sale of their main home. Additionally, gains from the sale of depreciated investment real estate may be subject to “depreciation recapture,” taxed at a special rate of 25%. Stocks generally follow the standard short-term and long-term capital gains rates.
Q4: How do I report capital gains on my tax return?
A4: Capital gains and losses of any kind are typically reported to the IRS on Schedule D, “Capital Gains and Losses,” which is filed with your federal income tax return.
Q5: What is a “step-up in basis” and how does it help with capital gains?
A5: A “step-up in basis” is a tax advantage that occurs when an inherited asset’s cost basis is adjusted to its fair market value on the date of the original owner’s death. This effectively erases any capital gains that accumulated during the original owner’s lifetime, meaning the heir can sell the asset with little to no capital gains tax liability, as their new basis is the market value at the time of inheritance.
