Investments that have grown in value can produce capital gains when you sell them. Here are some points to consider that may help minimize the tax bite.
EVEN WHEN YOUâRE INVESTING FOR THE LONG TERM, you may want to sell stock along the way. Perhaps you need to get your portfolio back to your target mix after a period when stocks outperformed bonds. Or you may need to raise cash for your upcoming retirement or a major purchase. Or market volatility has you rethinking your tolerance for taking investment risks.
No matter the reason, when you sell investments that have gained in value, you may be looking at a significant tax bill. Here are answers to the most common questions about the federal income tax consequences of selling assets and what you can do to minimize how much you owe. (State and local taxes may also apply, so you should consult with your tax advisor.)
Have you ever sold a stock and been shocked by the tax bill that came with your profits? I sure have! Understanding how long you need to hold investments to minimize those pesky capital gains taxes can make a huge difference to your bottom line. Let’s dive into the nitty-gritty of capital gains holding periods and how you can keep more of your investment returns in your pocket.
The Magic One-Year Mark: Short-Term vs. Long-Term Capital Gains
The simple answer to how long you need to hold a stock to avoid higher capital gains tax rates is more than one year,
When you sell a stock or other capital asset for more than you paid for it, the profit is considered a capital gain. But here’s the important part – not all capital gains are taxed equally. The tax system essentially rewards patient investors with lower tax rates.
Here’s the breakdown:
- Short-term capital gains: Assets held for one year or less
- Long-term capital gains: Assets held for more than one year
Short-Term Capital Gains Tax Rates (2025)
If you’re impatient and sell your stocks after holding them for a year or less, you’ll pay short-term capital gains tax. These gains are taxed as ordinary income – which means they’re added to your regular income and taxed at your normal income tax bracket rate
For 2025, here are the short-term capital gains tax rates (same as ordinary income tax rates):
| Filing Status | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
|---|---|---|---|---|---|---|---|
| Single | Up to $11,925 | $11,926-$48,475 | $48,476-$103,350 | $103,351-$197,300 | $197,301-$250,525 | $250,526-$626,350 | Over $626,350 |
| Married filing jointly | Up to $23,850 | $23,851-$96,950 | $96,951-$206,700 | $206,701-$394,600 | $394,601-$501,050 | $501,051-$751,600 | Over $751,600 |
As you can see, these rates can go up to 37% for high-income earners! That’s a big chunk of your profits going to Uncle Sam.
Long-Term Capital Gains Tax Rates (2025)
Now here’s where patience pays off. If you hold your investments for more than one year before selling, you’ll qualify for the much more favorable long-term capital gains tax rates:
| Filing Status | 0% rate | 15% rate | 20% rate |
|---|---|---|---|
| Single | Up to $48,350 | $48,351-$533,400 | Over $533,400 |
| Head of household | Up to $64,750 | $64,751-$566,700 | Over $566,700 |
| Married filing jointly | Up to $96,700 | $96,701-$600,050 | Over $600,050 |
| Married filing separately | Up to $48,350 | $48,351-$300,000 | Over $300,000 |
The difference is striking! If your income is moderate, you might even qualify for the 0% long-term capital gains rate. That’s right – zero taxes on your profits if your total income falls below the thresholds listed above.
A Real-World Example: How Patience Pays Off
Let me show you how big a difference this can make with a real example:
Suppose my wife and I bought 100 shares of a stock at $20 per share ($2,000 total investment). A year later, the stock is worth $50 per share, and we’re deciding whether to sell.
Our combined income from our regular jobs is $100,000 per year, and we file our taxes jointly.
Scenario 1: Selling after 11 months (Short-term)
- Purchase price: $2,000
- Sale price: $5,000
- Capital gain: $3,000
- Tax rate: 22% (our marginal tax bracket)
- Tax owed: $660
- After-tax profit: $2,340
Scenario 2: Waiting just 2 more months (Long-term)
- Purchase price: $2,000
- Sale price: $5,000
- Capital gain: $3,000
- Tax rate: 15% (long-term capital gains rate)
- Tax owed: $450
- After-tax profit: $2,550
Just by waiting a couple more months, we’d save $210 in taxes! That’s a 32% reduction in our tax bill, just for being patient.
Special Cases and Exceptions
While the one-year rule applies to most stocks and investments, there are some special cases worth noting:
Collectibles (28% Rate)
If you’re investing in art, antiques, coins, precious metals, or other collectibles, you’ll face a flat 28% capital gains tax regardless of your income level. This applies even for long-term gains.
Qualified Small Business Stock
If you’ve invested in qualifying small business stock, you might be eligible for significant tax benefits if you hold the stock for at least five years. This can include a potential exclusion of up to 100% of the gain from taxation (with certain limits).
To qualify, the stock must:
- Be from a domestic C corporation
- Have aggregate gross assets that never exceeded $50 million
- Be acquired after September 27, 2010
- Be held for at least 5 years
The gain eligible for this treatment is capped at $10 million or 10 times your adjusted basis in the stock, whichever is greater.
Investment Real Estate (25% for Depreciation Recapture)
If you’ve been claiming depreciation deductions on investment property, be aware that when you sell, that depreciation will be “recaptured” and taxed at a special 25% rate (rather than the normal long-term capital gains rates).
Additional Tax Considerations
Net Investment Income Tax (3.8%)
If you’re a high-income earner, you may face an additional 3.8% tax on your investment income, including capital gains. This kicks in if your modified adjusted gross income exceeds:
- $250,000 for married filing jointly
- $200,000 for single or head of household
- $125,000 for married filing separately
State Capital Gains Taxes
Don’t forget that many states also tax capital gains! The good news is that several states have no income tax and therefore no capital gains tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
If you live in one of these states, you’ll only need to worry about federal capital gains taxes.
Strategies to Minimize Capital Gains Taxes
1. Be Patient
The most obvious strategy is simply to hold your investments for more than a year whenever possible. The tax savings can be substantial.
2. Use Tax-Advantaged Accounts
Investments in retirement accounts like 401(k)s and IRAs grow tax-deferred, and Roth accounts can even provide tax-free growth. Consider maxing these out before investing in taxable accounts.
3. Time Your Sales Wisely
If you must sell investments that will trigger capital gains, consider doing so in years when your income might be lower, potentially qualifying you for lower tax rates.
4. Consider Tax-Loss Harvesting
If you have investments that have lost value, you might be able to sell them to realize losses that can offset your capital gains, reducing your tax bill.
The Bottom Line: Patience Pays Off
So, how long do you need to hold a stock to avoid capital gains tax? While you can’t completely avoid capital gains tax (unless your income is low enough to qualify for the 0% rate), holding investments for more than one year can significantly reduce your tax burden.
I’ve personally made the mistake of selling too early and facing those higher short-term rates. Trust me, it’s worth marking those purchase dates on your calendar and trying to stretch your holding period beyond the one-year mark whenever possible!
Remember, the tax code rewards patient investors. By understanding these rules and planning accordingly, you can keep more of your investment returns and build wealth more efficiently.
Have you ever been hit with an unexpected capital gains tax bill? Do you have strategies for managing investment taxes? I’d love to hear your experiences in the comments below!
How are stocks and bonds taxed?
When you sell an asset like a stock or bond for a gain, your potential federal income tax liability depends on two factors: How long youâve owned the asset and where you hold it. Within a tax-deferred account like a traditional IRA or workplace retirement plan, you will not owe federal income taxes on any gains from selling investments until you withdraw earnings and contributions.
Outside of a tax-deferred account, timing is crucial. If youâve owned the asset for a year or less, your gain will be taxed as ordinary income, with rates currently as high as 37%.1 For stocks or bonds youâve owned for more than a year, you could face a capital gains tax as high as 20%1 on your profits (rates vary depending on your income). Even a 20% tax âmay be a small price to pay for success,â says Joe Curtin, head of Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank. âYou can celebrate keeping the 80%.â
Your profit when you sell a stock, house or other capital asset. If you owned the asset for more than a year, the gain is considered long-term, and special tax rates apply. The current capital gains tax rates are generally 0%, 15% and 20%, depending on your income.1
Stock dividends may also be subject to these favorable capital gains tax rates as long as they are âqualified,â which is based in part on how long youâve owned the stock; if not, ordinary income tax rates apply. Bond interest payments are taxable as ordinary income, but federal and state tax treatment varies depending on the type of bond (municipal, government or corporate).
Can I avoid capital gains taxes?
For the most part, no. However, there are a few instances where you may be able to. When you sell your primary home, for instance, you may be able to exclude up to $500,000 in capital gains from your taxes if youâre a married couple filing jointly (or $250,000 for single filers). Here are other strategies to consider:
When you sell appreciated stocks within a retirement plan, youâll face no federal taxes on the sale at that time. However, with a traditional IRA or 401(k), youâll eventually pay ordinary income taxes on gains, earnings and your original contributions when you take withdrawals. So taxes are only deferred. But in a Roth account, qualified withdrawals in retirement are generally tax-free.
âIf a good part of your portfolio is up in value, while a smaller part is down,â Curtin says, âselling some of those âdownâ investments at a loss â known as tax-loss harvesting â could help offset the tax you owe from selling better-performing stocks.â Whatâs more, if your capital losses are worth more than your capital gains in any given year, you may be able to deduct up to $3,000 (or $1,500 if married and filing separately) of that excess from your ordinary income and carry forward the unused losses to claim in later years, though there are certain limitations.2
A tax law that prohibits you from claiming a capital loss on your tax return if you purchase the same or a âsubstantially identicalâ investment within 30 days of the sale.
Selling a poor performer to harvest a tax loss doesnât necessarily mean giving up on investments you believe in. If want to keep an investment thatâs dropped in value, consider harvesting the loss and then buying it again later. Make sure to work with your tax professional to time your purchase. If you buy the same or substantially similar investments 30 days before or after the initial sale, you might trigger wash-sale rules, and you would not be able to claim the loss on your taxes.
When you donate to charity, consider giving appreciated stock instead of cash. You may be able to deduct the fair market value of the stock if youâve held it for more than one year (subject to certain adjusted gross income limitations), and you can use the cash you would have donated to purchase new investments.
TIP: To get the federal tax benefits up front and the ability to make gifts to charity over time, consider donating appreciated stock to a donor-advised fund.
How to AVOID Taxes (Legally) When you SELL Stocks
FAQ
How long do you need to keep a stock to avoid capital gains tax?
If you hold a stock for one year or longer, your gain will be taxed at the long-term capital gains tax rate. But if you hold a stock for less than one year before selling it, your gain will typically be taxed at your ordinary income tax rate.
Can I sell stock and reinvest without paying capital gains?
Does reinvesting reduce capital gains? Real estate investors can employ certain tax strategies to potentially defer gains on the sale of a property. But with stocks, reinvesting your gains does not reduce the federal income taxes you may owe.
Do you have to wait 2 years to avoid capital gains?
Qualifying for the exclusion
In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You’re eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.
What is the 12 month rule for capital gains?
The 12 month rule generally requires that forex realisation gains and losses on the acquisition or disposal of capital assets be folded into the CGT treatment …Mar 1, 2016