How to Legally Pay Zero Dollars in Capital Gains

John Boyd, CFP®
August 3, 2023

The prospect of paying zero percent in capital gains tax when selling an asset like a stock or an ETF might sound like a fantasy, but it’s not! It is entirely possible, and this article will explore how you can legally avoid capital gains tax in a clear and straightforward manner.

The Significance of Ownership Period

Understanding the ownership period of an asset can make a significant difference in future tax implications when sold. For example, If you purchase a stock, make a $1,000 profit, and then sell it within six months, you’ll have a $1,000 capital gain that you generally have to report as ordinary income tax.

However, the IRS rewards patient investors. If you hold onto the same stock for over a year and then sell it for that $1,000 gain, you’d qualify for long-term capital gains, which are generally taxed at 15 percent – a substantially better rate than ordinary income tax.

Paying Zero Percent in Long-Term Capital Gains Tax

You might be wondering how it’s possible to legally pay zero percent in long-term capital gains tax. The answer lies in understanding capital gain brackets. Below is a breakdown of the Long-Term Capital Gains brackets for 2023.

*Single Filers*		*Married Filing Joint*
0%	$0-$44,625	0%	$0-$89,250
15%	$44,626 – $492,300	15%	$89,251 – $553,850
20%	$492,301 or higher	20%	$553,851 or higher

If you’re filing a joint tax return and your taxable income is below $89,250, your long-term capital gains rate would be zero percent.

One essential distinction to make is the difference between taxable income and gross income. Taxable income considers 401k contributions, HSA contributions, etc. and either the standard or itemized deduction, significantly reducing your overall income.

Case Study: Paying Zero Percent in Capital Gains Tax

Let’s illustrate this with a hypothetical scenario. Suppose you and your spouse have a gross income of $149,950, make 401k contributions of $40,000, HSA contributions of $7,750, and take the standard deduction of $27,700 in 2023. This will bring your taxable income to $74,500.

Now, imagine that three years ago, you bought a hundred shares of XYZ stock at $10 a share, for a total acquisition cost of $1,000. In 2023, you sold those hundred shares at $50 a share, resulting in a total sale proceed of $5,000. This will give you a long-term capital gain of $4,000.

This gain will increase your taxable income to $78,500. However, since it’s still below the $89,250 threshold, you pay zero percent on that long-term capital gain, effectively avoiding paying any taxes on that transaction.

This strategy is not a loophole but a fully legal, IRS-compliant approach to managing your capital gains taxes. However, it’s crucial to remember that capital gains can increase your taxable income, pushing you into the 15 percent tax bracket if not managed carefully.

Key Considerations

To effectively deploy this strategy, keep these three considerations in mind:

Short and Long-term Capital Gains: Review your portfolio to understand which assets have short-term gains (held for less than a year) and long-term gains (held for over a year). Only assets with long-term gains are eligible for this strategy.
Deductions: Be mindful of your deductions. If you’re near the eligibility threshold for this strategy, consider modifying your 401k contributions or other deductions to reduce your taxable income.
Tax Gain Harvesting: Instead of tax loss harvesting (incurring losses to reduce capital gains taxes), consider tax gain harvesting when your taxable income is low enough. You might choose to take gains off the table while your long-term capital gains tax is at zero percent, especially in years when markets have significantly gone up.

Utilizing these strategies can help you avoid paying capital gains taxes legally. If you need assistance in incorporating these tactics into your own tax plan, you can reach out to us below.

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