Ways to Potentially Defer Capital Gains Tax on Stocks

Posted Jun 30, 2021


Raise your hand, if you can relate to the following scenario.

Following the time-honored investment rule of “buy low, and sell high,” you acquired the publicly traded Acme Building Supplies stock in the midst of the COVID-19 pandemic. These days, the Acme Building stock is doing very well, prompting you to consider selling it for a tidy profit.

When you approach your CPA sister-in-law for advice, she tells you that selling might be a good idea. Then she reminds you to watch out for the capital gains taxes on the profits of that sale. Those taxes, she points out, could take a bite out of your gains.

(Re) Defining Capital Gains Taxes

We’ve written a great deal about capital gains taxes -- on the sale of property held for business or investment purposes. But selling that real estate asset isn’t the only way to generate capital gains (or the ensuing taxation).

As such:

  • Capital assets consist of things owned and used for personal purposes, pleasure, or investment. Your furniture could be considered a capital asset. So are the above-referenced stocks.
  • Capital gains are defined as an increase in the value of any capital asset, whether investment or real estate, that gives it a higher worth than the basis of that asset.
  • Basis is defined as the original purchase price of an investment, plus out-of-pocket expenses -- in the case of a stock or mutual fund, this could consist of brokers’ fees or commissions.
  • And, “capital gains tax” is what you owe, in state or federal taxes, on capital gains realized from the sale of a capital asset.

Let’s say you shell out $2,000 to acquire 100 shares of Acme Building Supplies at $20 per share. Investment in Acme Building Supplies is brisk, and you end up selling those 100 shares at $30 per share. Your capital gain is the profit from that sale, less any additional brokers’ fees or commission. 

Deferring Those Capital Gains Taxes

Once upon a time, you could have deferred capital gains taxes from the sale of that stock through use of a 1031 exchange. However, the Tax Cut and Jobs Act (TCJA), which took effect on Jan. 1, 2018, eliminated personal property assets (such as stamp collections, art, and yes, your stocks) from like-kind exchange treatment. This means only capital gains from the sale of real estate for investment or business purposes are eligible for this tax-deferral strategy. 

But you can use the following strategies to manage, or possibly defer capital gains from the sale of your stock.

Longer hold periods. The IRS divides its capital gains tax methods between short-term (less than a year) and long-term (one year, or longer). If you sell your Acme Building stock within six months, the IRS will tax your gain as ordinary income. Depending on your income bracket, this tax could be as high as 37%. 

Qualified Opportunity Zones. Another outgrowth from the TCJA is the Qualified Opportunity Zone (QOZ) program, which allows you to defer capital gains taxes from your Acme Building stock sale, by rolling that profit into a Qualified Opportunity Fund. The QOF then funnels your gains (and those of others) into federally designated, lower-income areas. In addition to helping lower-income communities, the process means you can defer capital gains taxes until 2026.

Taking Stock of Your Stocks

While the IRS does require you to pay taxes on any profits earned from your stock sale, there are ways in which you can help lessen the impact. Taking advantage of tax-management strategies -- as suggested by your sister-in-law, the CPA, or any other tax expert -- can help reduce the taxation bite. 

For more information about potential tax management strategies, contact Realized Holdings by logging on to www.realized1031.com, or calling 877.797.1031.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
There is no guarantee that the investment objectives of any particular program will be achieved. Hypothetical results are for illustrative purposes only, and are not intended to represent the past or future performance of any specific investment.  Realized does not provide tax or legal advice. The material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a real estate transaction may impact investor returns, and may outweigh the tax benefits. The income stream and depreciation schedule for any investment property may affect the property owner’s income tax bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains, and result in immediate tax liabilities. The purchase of interests in any QOZ program is speculative, and is suitable only for persons who have no need for liquidity in their investment, and who can afford to lose their entire investment.

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