How To Avoid Capital Gains Tax

Strategies for avoiding capital gains tax

If you've sold an asset for a profit or realized an increase in the value of your stock portfolio, you may be wondering how to avoid capital gains tax to maximize the amount of money you're able to keep or reinvest. There are proven and safe strategies you can use for avoiding capital gains tax, all of which are perfectly permissible under the law.

Under capital gains tax law, only realized gains can be taxed -- not "paper gains," in which you've made a theoretical profit but haven't liquidated the asset to actually access the money. The most effective methods of avoiding capital gains take advantage of this fact by redistributing, shielding or borrowing against assets that you own.

Methods for Avoiding Capital Gains Tax

In the United States, capital gains tax rates vary depending on which income tax bracket you are in. The lowest tax brackets do not pay any capital gains taxes, so you can avoid them by finding enough deductions or tax credits to reduce your taxable income to one of the lowest levels (10 or 15 percent income tax). If this is not possible, you may be able to use some of these strategies for avoiding capital gains taxes:

  • Make a donation. You can use a portion of your profits to make a tax-deductible donation to a charity -- better they get it than the government, right?
  • Leverage your profits. You can use your assets to buy puts, sell calls or make other speculative investments. This is an advanced strategy that does require some risk, so you need to carefully educate yourself before you use it.
  • Transfer assets. You can give the appreciated assets to a family member in a low tax bracket to avoid the taxman. However, be aware that you have a lifetime limit of the amount of assets you're allowed to transfer tax-free.
  • Borrow against your assets. This is one of the methods used by very wealthy people to avoid paying capital gains taxes. Instead of liquidating the assets, they borrow against them, then reinvest the borrowed capital in the hopes of generating a rate of return that exceeds the interest rate they're paying on the loan.

Further capital gains tax information is available from your accountant or financial advisor. It is recommended that you use professional guidance to take advantage of the aforementioned strategies.

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