Manage Your Capital Gains Tax Bracket

Strategically timing capital gains realizations can optimize long-term capital gains taxation by managing applicable brackets and shifting gains to years with lower marginal rates.

Strategy Overview

Long-term capital gains tax rates are lower than ordinary income tax rates, but have a similar progressive taxation structure (i.e. the tax rate applied to long-term capital gains increases as your income/gains increase).

By understanding the long-term capital gains tax bracket thresholds and where your taxable income and capital gains will likely fall, you may be able to shift gains to a year with a lower applicable tax bracket.

Tax Details

Federal long-term capital gains tax rates increase with both your total taxable income and realized capital gains for the year. As such, strategically timing stock sales and/or using other strategies can help you manage your capital gains brackets to potentially lower applicable taxes. Key parts of the strategy include:

• Intentionally delay sales of (at least some) stock to a future year when the incremental capital gains tax is anticipated to be lower. For many tech workers this would be optimizing for LTCGs to be taxed at the 15% bracket versus the 20% bracket (Capital Gains & NIIT Tax)

• Maximize income tax deductions (e.g. contributions to retirement accounts, HSAs, etc.) to lower your taxable income. Because the long-term capital gains tax rate thresholds are crossed with income + capital gains, reducing your taxable income will provide a larger window for LTCGs at lower tax rates

• Strategically utilize tax-loss harvesting to offset realized capital gains (and ideally keep gains in a lower LTCG tax bracket).

• Manage your income tax bracket via strategies like deferring the exercise of NSO options to a future year (reducing income taxes and thus providing a larger window for LTCGs at lower tax rates)

Key Benefits

• Reduce the long-term capital tax gains rate applied to your realized gains. Most commonly this allows individuals to reduce rates from 23.8% to either 15% or 18.8%. But in select scenarios, the reduction could be as large as 23.8% (e.g. from 23.8% to 0%).

Key Considerations/Flags

• Investment risk. If you delay selling shares, you'll still have investment exposure/risk to the underlying company's stock price (and potential declines in value).

• Can be complex to implement for concentrated positions with large embedded gains. When undertaking this strategy, we would recommend that you have a good understanding of tax lot management, and understanding/correcting cost basis Post-IPO for NSOs.

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• When you have a significant amount of stock with large embedded gains that will eventually need to be realized. Bonus points if you have other investments with embedded losses to pair together via tax-loss-harvesting

• If you project being in lower ordinary income tax brackets in the future. All else equal, this will increase the amount of long-term capital gains you can realize at lower applicable tax rates

🔴 When to Not Use This Strategy:

• You're not comfortable with (or concerned by) the investment risk associated with deferring the sale to the future

• If you need cash (from stock sales) in the near term for major purchases or diversification. Holding periods defer access to funds

• If it is difficult to accurately predict your future income, stock gains, and bracket impacts year-to-year. Unforeseen changes can disrupt planning.

• If your gains are sizeable or your income is very large. Large gains in concentrated stock positions and/or high income anticipated for many years likely means you won't ever have an opportunity for much (if any) lower LTCG tax rates

Example