There are several methods a taxpayer can use to avoid or defer paying the capital gains tax on stock appreciation. The simplest is not to sell the stock, although even that is not a sure bet. First, remember that if you hold stock for less than a year and then sell it, the tax calculation will be for ordinary income rather than a capital gain. By keeping the security for one year, you are already enjoying the benefit of savings. Still, if the stock has appreciated considerably, the tax due on the capital gain may be significant as well. If you prefer to defer or avoid the tax on the growth, you may want to consider these options.
Don't Sell It
The sale proceeds minus the cost basis equals the capital gain if you sell the stock or give it to someone. If you die before giving the stock away or selling it, however, the cost basis in almost all situations is stepped up to the fair market value as of the date that you die, which erases the impact of the gain that took place while you owned it. The heir can sell the stock at the price at which they inherited it without owing a capital gains tax. Remember that if you are holding a stock that loses value, the loss is also erased when you die.
Donate It
A second option to consider is donating stock instead of cash when planning a philanthropic gift. If you were to sell stock in order to fund a donation, you would first pay the capital gains tax on the appreciated value of the stock that you choose to relinquish. Instead, make a gift of the stock. That approach allows you to take a larger tax deduction, eliminates the need to pay capital gains taxes, and affords the recipient to enjoy greater flexibility in their portfolio management.
Balance a Gain with a Loss
Unless you are exceptionally good at picking winners, you may have stocks that depreciate as well as those that grow. You can offset the capital gains that result from the wins with the capital losses that occur from selling the ones that don't produce profits. You can use capital gains losses to neutralize the gains entirely and then deduct an additional $3,000 against ordinary income. If you still have a loss balance, you can carry it over. If you employ this popular strategy and plan to purchase the declining stock again, you need to ensure that you do not violate the rules against a wash sale (generally a sale and purchase within 30 days).
Invest in Opportunity Zones
The Tax Cuts and Jobs Act created Opportunity Zones, which are defined as economically distressed communities where new investments may be eligible for preferential tax treatment. Investment in these areas through Qualified Opportunity Funds is an avenue for deferral of tax. These funds are complex and have some unresolved and contentious terms, so consult your tax advisor with questions.
