Tame your capital gains tax bite

A cornerstone of tax planning is year-round management of your property sales and purchases. And a key component of this activity is knowing that the resulting sale of a home, stock or collectible creates a taxable gain or loss with varying tax implications. Here are six capital gain tax-cutting opportunities to consider:

1. Take advantage of lower long-term capital gains rates. Assets sold for a gain that are held for more than one year benefit from lower tax rates. Instead of paying ordinary tax rates as high as 37 percent, you get a lower rate of zero to 20 percent, depending on your income. Before selling an asset, first check when it was purchased to see if it will benefit from these lower tax rates.

2. Wisely harvest short-term losses. Since capital gains are taxed at different rates, the IRS requires that capital losses are first applied to any losses from the same category. For instance, long-term losses are initially netted against long-term gains. Any excess losses can then be applied to short-term gains and up to $3,000 of ordinary income. Take advantage of this rule by trying to match any losses against short-term gains and ordinary income whenever possible.

3. Watch out for the special collectibles tax rate. Certain items deemed collectibles can get taxed at an even higher rate, up to 28 percent, when you sell them. Examples of collectibles as defined by the IRS include valuable paintings, trading cards, or rare coins. If you plan to sell a collectible item, first track your basis (original price plus fees you paid for the item) to ensure an accurate capital gain amount can be calculated. Next, check your marginal tax rate. If it’s lower than 28 percent, selling an unwanted collectible before you’ve owned it for one year could result in a smaller tax bite.

4. Treat cryptocurrency as an investment. Every exchange of cryptocurrency such as Bitcoin has a component of gain or loss that must be tracked. This includes using the cryptocurrency to make a purchase, or simply trading the currency on an exchange. All these transactions must be reported on your tax return as a capital gain or loss.

5. Understand the primary residence capital gain exclusion. One of the best tax breaks going is the $250,000 ($500,000 if married) primary residence gain exclusion. But not understanding the rules can cost you. It is especially important to understand the length of time you have owned the property and when your property can be treated as your primary residence.

6. Leverage gains with charitable giving. Consider donating property with a long-term capital gain to a qualified charity. If the donation meets certain rules, not only will you avoid paying capital gain taxes, you will receive a tax deduction equal to the higher fair market value of the property you donate.

With so many rules and various tax rates, it’s important to consider the tax consequences with every investment or property transaction before you buy or sell.

One of my primary objectives is to help you achieve your financial goals through a holistic approach that is tax-efficient in my wealth management and tax resolution practice. For more information, visit www.fredtfoxiii.com.

Fred T. Fox III is a Lawton businessman.