Benjamin Franklin famously quipped that there’s nothing more certain in life than death and taxes. For investors, they must often deal with the latter as investment gains aren’t immune from taxes.
Whenever an investor sells a holding for a gain, it may result in a tax bill. It’s not uncommon for investors to try to minimize potential tax impacts. Fortunately, there are some legal ways to avoid paying taxes on your investment gains. Here’s how.
What Gets Taxed
Understanding how investment gains are taxed starts with how long you’ve owned an asset.
If you sell an investment you’ve held for less than one year, the profit is considered a short-term capital gain and is taxed as ordinary income, according to the IRS. Investments held for more than a year qualify for long-term capital gains, which are typically taxed at lower rates.
With careful income planning, some Americans could qualify for the 0% long-term capital gains tax bracket in 2026. That includes single filers earning up to $48,350 and married couples filing jointly earning up to $96,700. Reaching this threshold isn’t about loopholes — it’s about managing income and holding investments long enough to qualify for favorable tax treatment.
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Use Tax-Loss Harvesting
Tax-loss harvesting is a popular way to offset trading gains. The goal is to sell an investment at a loss to offset realized gains on other holdings, according to Vanguard. This strategy may help investors eliminate taxable gains for the year.
Tax-loss harvesting sounds difficult, but it’s simple in practice. After realizing a capital gain, you sell a stock that’s incurring a loss. The loss helps offset the realized gain. Vanguard warns to be aware of the wash-sale rule, as it can disallow the loss. A wash sale occurs when you buy the same or nearly identical holding within 30 days before or after the sale.
The IRS allows Americans to use up to $3,000 in net losses annually. If you have overage, it allows you to carry it forward.
Trade in a Roth IRA
Saving for retirement is typically a good thing, but Roth IRAs and 401(k)s can also help shelter you from taxable gains. Savers won’t receive the tax benefit for contributions in the current year as they’re after-tax contributions. On the flip side, traditional IRAs provide a tax benefit for contributions made in the current year.
The beauty of Roth IRAs and 401(k) is that you can trade and rebalance without incurring capital gains. And Roth accounts let Americans withdraw funds tax-free in retirement, in addition to the tax-free growth you can build.
Traditional IRAs are great tools to use for retirement planning, but people are typically taxed on withdrawals in retirement. Speak with a financial advisor to determine which is best for you to avoid possible issues.
Use Capital Gains Harvesting
Capital gain harvesting, also known as tax-loss harvesting, is a less widely used tool than the popular tax-loss harvesting strategy. Investors may want to use capital gains harvesting in a low-income year to pay 0% on gains.
According to Charles Schwab, investors may sell appreciated assets during years when their taxable income places them in the 0% long-term capital gains bracket. If they want to maintain their position, they can repurchase the investment later, effectively resetting the cost basis at a higher level.
Unlike harvesting losses, harvesting gains doesn’t trigger the wash-sale rule. However, it’s important to remember that the strategy applies to total taxable income — not just salary.
Avoiding taxes on investment gains is possible, but it requires careful planning. Working with a financial advisor and a tax professional can help ensure these strategies align with your broader portfolio goals. Investors should also keep state taxes in mind, as some states still tax capital gains even when federal taxes don’t.
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This article originally appeared on GOBankingRates.com: Here’s How To Avoid Paying Taxes on Investment Gains in 2026 — Legally
