Five Smart Strategies to Reduce Your 2024 Capital Gains Taxes

This year has been very good for investors. The S&P 500 index has gained nearly 30%. The small-cap Russell 2000 index is up more than 20%. Growth, value and dividend indexes also have realized double-digit gains. Bitcoin is hovering near the $100,000 mark.

Though gains are always welcome, they bring the prospect of capital gains taxes. If you realized capital gains this year in a taxable account or anticipate doing so before year-end, you still have time to reduce your 2024 tax bill. Here are five tax-savvy strategies that you, as an investor, can use:

1. Offset Gains With Losses

Realized capital gains can be offset by realized losses in the same calendar year. Begin by matching long-term losses to long-term gains and short-term losses to short-term gains. Excess short-term capital losses can then be applied to long-term gains, and vice versa. In addition, you can apply any capital losses carried over from past years (such as 2022) to gains you realized this year.

The maximum net loss you can claim is $3,000 per year. Any net losses above this level can be carried over to future years. Net capital gains exceeding these offsets are taxable in the year they are realized.

2. Consider Tax-Loss Harvesting

While we don’t advocate letting the tax tail wag the portfolio dog, harvesting losses for tax purposes can make strategic sense. Tax-loss harvesting is purposely selling an investment at a loss to realize a tax loss. It makes the most sense when an investment is already under consideration for removal from your portfolio—be it for triggering a sell rule or because you are seeking to reduce the number investments you hold.

If you are solely selling to realize a loss and plan to repurchase the investment, be careful not to violate the wash-sale rule (discussed below).

3. Donate Appreciated Investments to Charity

The higher standard deduction ($29,200 for married couples filing jointly and $14,600 for singles in 2024) has made it harder for many taxpayers to itemize, but donating appreciated investments to charity can get you over the hump. Bundling the donation of appreciated investments with other planned charitable contributions can be a highly effective tax strategy. When you gift an appreciated investment, you avoid paying capital gains taxes on it and can claim a charitable deduction for its full market value.

Investments that have fallen in value can be donated too, but you are better off selling them and then donating the proceeds. This gives you a loss to offset capital gains and a separate charitable deduction that can be used if you itemize.

4. Gift Appreciated Investments

Gifting an investment can be a win-win for you and the gift recipient if certain conditions exist. You avoid paying any capital gains taxes. The giftee receives the investment and your cost basis. This is most beneficial when the person making the gift is in the 20% capital gains bracket and/or subject to the 3.8% net investment income (NII) surcharge and the giftee is in the 0% capital gains tax bracket. (Married joint filers and single filers with taxable income up to $94,050/$47,025 qualify for the 0% capital gains rate in 2024.)

Be cognizant of the gift tax exclusion when gifting stocks, exchange-traded funds (ETFs) or other investments. The annual exclusion for 2024 is $18,000. It doubles to $36,000 for consenting couples.

5. Avoid the Wash-Sale Rule

Violating the wash-sale rule delays your ability to claim a loss for tax purposes. A wash sale occurs when you sell a stock, ETF or other security at a loss and repurchase a “substantially identical” investment within 30 days before or after the sale. Substantially identical investments include option contracts on the same security. You cannot add the investment to another account—e.g., an individual retirement account (IRA)—within 30 days and still claim the loss.

If you violate this rule, the loss on the investment you sold is then used to adjust the cost basis of the substantially identical investment.

You can navigate this rule by purchasing a similar but different investment. Examples include shares of a close competitor to the company whose stock you sold or a different ETF whose returns are close to the fund you sold. (An example might be selling an S&P 500 index fund and buying a Russell 1000 index fund instead.)

Your portfolio rules and withdrawal strategy should always be the determining factor when it comes to deciding whether to sell an investment.