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Avoiding capital gains tax on stocks is a question of which type of capital gains you are looking to avoid. A capital gain occurs when you sell a stock at a profit. If the profit is earned after holding the stock for less than 1 year, this is known as a short-term capital gain. If the gain is earned after owning the stock for more than 1 year, it is a long-term capital gain.
Short-term capital gains are taxed at a maximum rate of 35 percent while long-term capital gains are taxed at a maximum of 15 percent. There is no way to avoid paying gains on a stock within a short or long holding period unless you take either of the following steps.
Step 1: Make a Gift to a Minor
Although it is not possible to outright avoid capital gains, it is possible to take an appreciating asset such as a stock and gift it to a child. Current tax law permits that an annual gift of up to $13,000 can be made from a parent to a child without the gift being subject to tax. This is done under what is known as the gift tax exclusion.
Making a gift allows you to avoid the capital gains tax due. You lose ownership of the stock but you are able to make a tax-free transfer that stays within your family.
Step 2: Establish a Charitable Trust
You may also try establishing a charitable trust and transferring the stock in order to fund it. You can choose to establish a charitable remainder or charitable lead trust that provides a tax-free stream of income. This is an effective way to avoid capital gains tax on a stock and provide a lasting benefit to a charity.
With a charitable remainder trust, the stock is transferred to the trust. You choose an amount of income to be received by the beneficiaries of the trust. Upon your death, a stream of income will be paid for a period. At the end of the period, the remainder of the trust goes to a designated charity. The value of the gift is can be used as a charitable deduction by the donor.
A charitable lead trust works in the reverse way of a charitable remainder trust. In a charitable lead trust, you as the donor designate an income stream to receive prior to death. The remaining interest at your death goes directly to the charity. This type of gift also results in a charitable tax deduction.
Step 3: Contribute to a Section 529 Plan
A final step which may be taken to avoid capital gains tax due to a stock’s appreciation is making a gift to a section 529 College Savings Plan. This type of gift, subject to the gift tax exclusion described in Step 1, can be made to any member of your immediate family. It is possible to make the gift with a child as beneficiary and later on change the beneficiary to yourself. This allows you to essentially gift the stock to yourself and avoid or significantly delay capital gains taxes on the stock.
Conclusion
Each of these steps provides certain advantages and disadvantages to you as an investor. The biggest advantage is that these steps permit delay or avoidance of capital gains taxes.
Short-term capital gains are taxed at a maximum rate of 35 percent while long-term capital gains are taxed at a maximum of 15 percent. There is no way to avoid paying gains on a stock within a short or long holding period unless you take either of the following steps.
Step 1: Make a Gift to a Minor
Although it is not possible to outright avoid capital gains, it is possible to take an appreciating asset such as a stock and gift it to a child. Current tax law permits that an annual gift of up to $13,000 can be made from a parent to a child without the gift being subject to tax. This is done under what is known as the gift tax exclusion.
Making a gift allows you to avoid the capital gains tax due. You lose ownership of the stock but you are able to make a tax-free transfer that stays within your family.
Step 2: Establish a Charitable Trust
You may also try establishing a charitable trust and transferring the stock in order to fund it. You can choose to establish a charitable remainder or charitable lead trust that provides a tax-free stream of income. This is an effective way to avoid capital gains tax on a stock and provide a lasting benefit to a charity.
With a charitable remainder trust, the stock is transferred to the trust. You choose an amount of income to be received by the beneficiaries of the trust. Upon your death, a stream of income will be paid for a period. At the end of the period, the remainder of the trust goes to a designated charity. The value of the gift is can be used as a charitable deduction by the donor.
A charitable lead trust works in the reverse way of a charitable remainder trust. In a charitable lead trust, you as the donor designate an income stream to receive prior to death. The remaining interest at your death goes directly to the charity. This type of gift also results in a charitable tax deduction.
Step 3: Contribute to a Section 529 Plan
A final step which may be taken to avoid capital gains tax due to a stock’s appreciation is making a gift to a section 529 College Savings Plan. This type of gift, subject to the gift tax exclusion described in Step 1, can be made to any member of your immediate family. It is possible to make the gift with a child as beneficiary and later on change the beneficiary to yourself. This allows you to essentially gift the stock to yourself and avoid or significantly delay capital gains taxes on the stock.
Conclusion
Each of these steps provides certain advantages and disadvantages to you as an investor. The biggest advantage is that these steps permit delay or avoidance of capital gains taxes.
