Taxes are one of the largest drags on long-term investment returns. While market performance is outside of anyone’s control, thoughtful tax management can play a meaningful role in preserving wealth over time.

Capital gains taxes apply when investments are sold for more than their purchase price. The amount owed depends on how long the investment was held, your overall income, and where you live. In some cases, capital gains can also increase adjusted gross income (AGI), potentially affecting Medicare premiums, the Net Investment Income Tax, Social Security taxation, and other income-based thresholds.

Below are five commonly used approaches that investors and advisors can consider when managing capital gains exposure.

1. Tax-Loss Harvesting

Tax-loss harvesting involves intentionally realizing investment losses to offset realized gains.

When an investment is sold at a loss, that loss can generally be used to:

• Offset current capital gains
• Offset up to a limited amount of ordinary income each year
• Be carried forward to offset gains in future years

This approach can be particularly valuable:

• In high-income years
• When short-term gains (which are taxed at higher ordinary income rates) are present
• When managing AGI-related surtaxes, such as the 3.8% Net Investment Income Tax

Importantly, tax-loss harvesting must follow IRS wash sale rules. If a substantially identical security is repurchased within 30 days before or after the sale, the loss may be disallowed. For that reason, maintaining market exposure while avoiding wash sale violations requires careful coordination.

When used thoughtfully, harvested losses can create future tax flexibility and help smooth taxable income over time.

2. Capital Gains Harvesting

While many investors focus on avoiding gains, there are situations where intentionally realizing gains can be beneficial.

Capital gains harvesting involves realizing long-term capital gains in years when taxable income is temporarily lower. For some taxpayers, this may allow gains to be taxed at 0% or at a lower long-term capital gains rate.

Potential benefits include:

• Resetting cost basis at a low or no tax cost
• Reducing exposure to larger taxable gains in the future
• Improving long-term after-tax outcomes

This strategy is often most effective:

• During early retirement before required distributions begin
• In temporary income dips
• After a business transition or career change

By proactively managing the timing of gains, investors may create more control over future tax exposure.

3. Tax-Aware Long/Short Strategies

Some advanced investment approaches are designed to systematically generate realized losses while maintaining market exposure.

Long/short strategies may:

• Hold long positions in securities expected to appreciate
• Take short positions in securities expected to decline
• Use leverage and active risk management techniques

When structured appropriately, these strategies can generate realized capital losses that may offset large, one-time gains such as:

• Business sales
• Sales of concentrated stock
• Real estate transactions

These strategies are complex and involve additional risks, including leverage risk and short-selling risk. They require careful oversight, disciplined risk management, and coordination with a broader financial plan.

4. Maximizing Step-Up in Basis Opportunities

Under current federal tax law, assets held until death generally receive a “step-up” in cost basis. This means heirs inherit assets at their fair market value as of the date of death, potentially eliminating previously unrealized capital gains.

Key considerations include:

• Differences between community property and separate property states
• How jointly held assets are treated
• The impact of trusts and estate planning structures

In community property states, both spouses’ halves of community assets may receive a full step-up upon the first spouse’s death. In separate property states, the rules differ and may result in only partial step-up treatment.

A related concept sometimes discussed in estate planning is “Buy, Borrow, Die.” This approach
involves:

• Holding appreciated assets
• Borrowing against them to generate liquidity rather than selling
• Potentially eliminating deferred capital gains through a step-up at death

While this framework can be tax-efficient under current law, it requires careful management of debt, interest costs, and estate coordination. Legislative risk should also be considered, as tax laws can change.

5. ING (Incomplete Gift, Non-Grantor) Trusts

Incomplete Gift, Non-Grantor (ING) trusts are advanced planning vehicles sometimes used to manage state income tax exposure.

In certain situations, an ING trust may:

• Shift investment income and capital gains from a high-tax state
• Allow taxation in a lower- or no-tax state

These trusts are often evaluated prior to significant liquidity events, such as:

• Business sales
• Large asset dispositions

However, ING trusts are highly technical. Important considerations include:

• Federal trust tax brackets (which reach top rates at much lower income levels than individuals)
• State sourcing rules for income
• Ongoing administrative requirements

They require close coordination among legal, tax, and investment professionals to determine appropriateness and compliance.

Why Capital Gains Planning Matters

Capital gains management is not about eliminating taxes entirely. Rather, it is about:

• Managing the timing of taxable events
• Coordinating investment decisions with income and life transitions
• Reducing unnecessary tax drag
• Preserving flexibility for future planning

The Bottom Line: Because capital gains interact with AGI, Medicare premiums, Social Security taxation, and surtaxes, even small changes in realized gains can have ripple effects across a broader financial plan.

Thoughtful coordination between investment management, tax planning, and estate considerations can meaningfully influence long-term after-tax outcomes.

Sources:
https://www.kitces.com/blog/step-up-in-basis-gifting-assets-spouses-estate-tax-unrealizedgains-separate-property-states/https://www.kitces.com/blog/evaluating-the-tax-deferral-and-tax-bracket-arbitragebenefits-of-tax-loss-harvesting/
https://www.kitces.com/blog/obbba-one-big-beautiful-bill-act-tax-planning-salt-capsenior-deduction-qbi-deduction-tax-cut-and-jobs-act-tcja-amt-trump-accounts/
https://worldpopulationreview.com/state-rankings/capital-gains-tax-by-state
https://www.wealthmanagement.com/high-net-worth/the-benefits-of-incomplete-nongrantor-trusts
https://www.morningstar.com/financial-advisors/taking-tax-loss-harvesting-next-level
https://www.irs.gov/individuals/net-investment-income-tax
https://www.irs.gov/newsroom/irs-reminds-taxpayers-their-social-security-benefits-maybe-taxable
https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income
https://www.irs.gov/taxtopics/tc409
https://www.irs.gov/publications/p544

Disclosures: This material is for informational purposes only. The information provided does not purport to present a complete picture, but Collective Wealth Advisors LLC believes the information is representative of issues and needs facing some clients. This should not be construed as specific investment, tax, or legal advice. Individuals should seek advice from their wealth advisor or other advisors before undertaking actions in response to the matters discussed. No client or prospective client should assume the above information serves as the receipt of, or substitute for, personalized individual advice.

This represents the opinions of Collective Wealth Advisors LLC and presents information that may change. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or representation as to the future. All tax laws and regulations discussed are subject to change.

Investing involves risk, including, but not limited to, loss of principal. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material is prepared using third-party sources considered to be reliable; however, accuracy or completeness cannot be guaranteed. The information provided will not be updated after the date of publication.

Services and investment advice are only provided pursuant to an advisory agreement with the client. Collective Wealth Advisors LLC is a registered investment adviser with the SEC. Registration does not imply a certain level of skill or training and does not imply that any regulatory authority has endorsed or approved the qualifications of the firm or its representatives.