Are you overpaying on stock gains? 1 simple switch could help you legally cut taxes when you sell (and in some cases avoid them entirely)

You can also end up owing the IRS money when you sell an investment at a higher price than you initially paid. This is known as a capital gains tax.

For example, if you buy 10 shares of Company X at $10 apiece and sell them once their share price doubles, your taxable capital gain is $100. That’s because you’re selling assets for $200 when you only paid $100 to begin with.

With the right strategy, you can potentially reduce your capital gains tax bill. Here’s what it entails and how it might help you.

What do capital gains tax rates look like?

Before we talk about reducing capital gains taxes, it’s important to know what sort of tax bill you might be looking at. Capital gains are commonly grouped into two tiers.

Short-term capital gains apply to investments you’ve held for a year or less. Long-term capital gains apply to investments you’ve held for at least a year and a day.

Long-term capital gains are taxed at a lower rate than short-term gains. So, one of the best ways to minimize your capital gains tax bill is to hold investments long enough to be bumped into the long-term category.

Short-term capital gains are taxed based on your marginal income tax bracket, just like your salary or other ordinary income.

In 2025, the tax rates are: 10%, 12%, 22%, 24%, 32%, 35% or 37%. Which rate applies depends on your filing status (single, married filing jointly, head of household, etc.) and your taxable income.

The amount of long-term capital gains tax you pay also depends on your filing status and taxable income. However, there are just three rates: 0%, 15%, or 20%.

Keep in mind that you’re taxed every year for gains in a regular brokerage account. Gains in a traditional IRA or 401(k) are tax-deferred, meaning you don't pay taxes on them until you withdraw the money in retirement, while gains in a Roth IRA or 401(k) are tax-free because these accounts are funded with after-tax money.

How to reduce capital gains taxes

Your cost basis helps determine how much capital gains tax you owe. It represents the value of an asset at the time you purchase it.

If you buy shares of Company X for $10 per share, that's your cost basis. If you buy shares for $10 and sell them for $15, you're only liable for taxes on your $5 gain per share.

Things may get tricky, though, if you keep buying shares of the same stocks over time, or if you're entitled to shares of company stock as part of your compensation on an ongoing basis.

That's because you’ll end up with shares of the same stock with a different cost basis attached to them. When this happens, you need to be careful when selling.

If your goal is to minimize your capital gains tax bill, then you may want to sell your shares with the highest cost basis.

For example, say you bought shares of Company X for $10 in January, and then bought more shares of that same company for $11 in March.

If those shares are now worth $15, selling your January shares leaves you with $5 in capital gains per share. Alternatively, if you sell the March shares, you only have $4 in capital gains per share.

Brokerage accounts typically give you different options for selling shares. These commonly include:

** FIFO — first in, first out

• LIFO — last in, first out
• HIFO — highest in, first out

Using the example above, the FIFO method would have you selling your January shares, whereas the LIFO and HIFO methods would have you selling your March shares.

It's common for FIFO to be the default option if you don't select a preference. However, some brokerages give you the chance to select which specific shares in your account you wish to sell. If your goal is to reduce your capital gains taxes, you may want to use this option and choose which stocks to sell.