How to Pay 0% in Long-Term Capital Gains Tax

Paying taxes on your investment profits is a reality for most investors, but did you know it's possible to pay a 0% tax rate on long-term capital gains? This isn't a loophole for the ultra-wealthy; it's a feature of the U.S. tax code that anyone with the right strategy can use.

Understanding how to leverage the 0% capital gains tax rate can save you thousands of dollars and significantly boost your investment returns. This guide will break down how it works, who qualifies, and the strategies you can implement to take advantage of it.

What Are Long-Term Capital Gains?

First, let's cover the basics. A capital gain is the profit you make from selling an asset for more than you paid for it. The tax you pay depends on how long you held the asset:

• Short-Term Capital Gain: From an asset held for one year or less. These gains are taxed at your ordinary income tax rate, which can be as high as 37%.
• Long-Term Capital Gain: From an asset held for more than one year. These gains are taxed at preferential rates of 0%, 15%, or 20%.

The key to unlocking tax savings is to hold your investments for more than a year and manage your income strategically.

The Long-Term Capital Gains Tax Brackets

The tax rate you pay on long-term capital gains depends on your total taxable income. This includes your wages, salaries, interest, dividends, and the capital gains themselves.

Here are the income thresholds for the long-term capital gains tax rates for the 2024 tax year:

Source: IRS

As you can see, you can have a significant amount of income and still qualify for the 0% rate, especially if you're married and filing jointly.

How It Works: An Example

Let's illustrate with an example. Imagine you are a single filer in 2024 with the following income:

• Salary: $35,000
• Long-Term Capital Gains: $10,000

Your total taxable income is $45,000. Since this is below the $47,025 threshold for single filers, the entire $10,000 of your capital gains is taxed at 0%.

However, if your salary was $40,000 and you had $10,000 in gains, your total taxable income would be $50,000. In this case:

• The first $7,025 of your gains (to get you up to the $47,025 threshold) is taxed at 0%.
• The remaining $2,975 of your gains is taxed at 15%.

Strategies to Qualify for the 0% Rate

Achieving a 0% tax rate on your capital gains requires careful planning. Here are some effective strategies:

1. Time Your Asset Sales

The most powerful strategy is to sell your appreciated assets in years when your taxable income is low. This could be when you:

• Retire: Many retirees have lower taxable income, making retirement an ideal time to realize capital gains.
• Are between jobs or taking a sabbatical.
• Have a year with lower business income.

By aligning your asset sales with low-income years, you can realize gains without pushing your income into the 15% bracket.

2. Tax-Gain Harvesting

Tax-gain harvesting is the process of intentionally selling assets to realize long-term capital gains up to the 0% threshold each year. If you want to continue holding the asset, you can sell it and immediately buy it back. Unlike tax-loss harvesting, there is no "wash sale" rule for gains. This resets your cost basis to a higher value, reducing the taxable gain on a future sale.

3. Manage Your Other Income

Since capital gains are stacked on top of your other income, managing your overall taxable income is crucial. You can lower your taxable income by:

• Contributing to a traditional 401(k) or IRA: Contributions to these accounts are tax-deductible and lower your Adjusted Gross Income (AGI).
• Deferring income: If you have control over when you receive income (e.g., as a freelancer or business owner), you can defer it to a future year.

4. Tax-Loss Harvesting

Tax-loss harvesting involves selling investments at a loss to offset your capital gains. If your losses exceed your gains, you can deduct up to $3,000 of the excess loss against your ordinary income per year. Any remaining losses can be carried forward to future years. This is a great way to reduce your net capital gains, potentially keeping you in the 0% bracket.

Who Should Use This Strategy?

This strategy is particularly beneficial for:

• Retirees: With no wage income, retirees can often realize a significant amount of capital gains tax-free to supplement their retirement funds.
• Low-to-Moderate Income Earners: Individuals and families who are comfortably within the 0% bracket can use this to build wealth without a tax drag.
• Strategic Planners: Anyone who can control their income and the timing of their asset sales can benefit from this powerful tax-planning tool.

Paying 0% in capital gains tax is an achievable goal for many investors. By understanding the income thresholds and implementing smart strategies, you can keep more of your hard-earned investment profits.