How to Maximize Your Stock Gains

In investing, everyone’s heard of a story where someone begins to invest and suddenly becomes a millionaire overnight! The story you don’t hear is the taxes they will pay if they sell their stocks… To be fair, no one likes a story about taxes. Fortunately, there is a way to maximize your gains and minimize your tax liability. There are two common ways of achieving this goal. The first is “Tax Loss Harvesting” and the second is understanding how stock taxes work. Now that we’ve covered our options, let’s get into how to maximize your gains!

*Note: These strategies mainly apply to regular brokerage accounts. Regular brokerage accounts are accounts without tax advantages like a 401k, IRA, HSA, etc…

Also, we have a special guest! Our friend Finance In Short helped us out with this post. Make sure to check out his page, he makes highly detailed and easy to understand personal finance posts. I’m sure you will enjoy his work as much as ours!

What Are Capital Gains Taxes?

Capital Gains Tax is nothing but a tax applied on the profit earned when you sell an asset. This tax is applied to capital assets only. Such as stocks, real estate, bonds etc. The total profit you earn after selling one or more assets is referred to as “Capital Gains”. As soon as you sell the asset, the profit you earn becomes “realized”. Only the amount of “realized” capital gains is subject to a tax deduction. This deduction is applied only when you sell your asset for a potential profit. Let me emphasize on the phrase “potential profit”. Capital Gains tax is not applicable to potential loss. This means that if you sell an asset at a loss, you do not need to pay this tax.

The percentage of tax applied to profit gained on an asset depends on how long you have owned that particular asset. Hence, IRS uses different approaches to decide the percent of tax for short term and long term gains. Let’s look at this a little deeper –

Long Term & Short Term Gains

Short Term Gains or the profits earned on selling assets owned for less than a year are taxed along with your current salary. The short term gains are considered to be a part of your regular income. So, they are added to your income which is taxed at your income bracket.

Long Term Gains or the profits earned on selling assets owned for more than a year are taxed in a different way. Individuals will be taxed either 0, 15 or 20 percent depending on his/her income and whether the person is filing alone, with spouse or as head of the family.

These charts show your long term gains obligation: Long-term gains chart

How to Avoid Capital Gains

Any kind of tax is a pain, especially when you have spent so much time choosing a perfect stock to invest in and finally sold it for a good profit. But don’t worry, there are a few ways you can reduce the burden of Capital Gains Tax…

  1. Focus on Long Term gains – As mentioned above, long term gains are taxed differently and somewhat less than short term gains. Taxes on Long Term Gains are set to a maximum of 20%. Another factor that gives long term gains an edge is that you can potentially earn more profit if you own an asset for more than a year.
  2. Use Retirement Plans for Tax Advantage – Retirement plans like 401(K), Roth and Traditional IRA all are exempted from immediate taxes and act as a shield against Capital Gains Tax. Hence, if you invest via retirement plans you will not need to pay the tax immediately. The profit will not become tax free but whenever you withdraw the amount it will be taxed as per your current salary which will be less at the time of withdrawal.

What Is Tax Harvesting?

Tax Harvesting is a technique/strategy people use to give themselves a tax deduction or pay less in taxes every year. You may not know it but, everytime you sell an investment for a profit you have to pay some of that money back in taxes. For the stock market, the percentage in taxes you owe relies on 2 things.

  1. The tax bracket you fall under based on your income.
  2. Whether the investment was a short term gain (held less than 1 year), or long term gain (held more than 1 year).
    • Usually, long term gains are around 15%, while short term gains are 35%.

Tax harvesting on stocks is the act of selling an investment for a loss on purpose. If you sell an investment for a loss, you can write off that loss on your taxes for that year. Or, you can deduct that loss from some of the profits you locked in on another investment. Either way, you reduce your tax obligation and maximize gains this way. You can write off a max of $3,000 a year in capital losses (losses on stock positions). Key is you have to sell the position and realize the loss.

How To Tax Harvest:

Here is an example that will show a better understanding.

Scenario #1

Say you started your portfolio June 10th 2020 and bought into 3 positions. 

  • 20 shares of $NKLA at 38.00 (Present day $18.24)
  • 10 shares of $UBER at $31.00 (Present day $50.82)
  • 10 shares of $SNAP at $17.00 (Present day $67.60)

Present day comes around and you see that Snapchat has gone up significantly so you sell all your shares realizing a gain of $500. You also see you are down on your Nikola shares but don’t like the company anymore so you decide to sell all your shares realizing a loss of $400. 

At this point you are at a realized gain of $100. (500-400). So you only pay long term taxes on the $100. If you would have just taken profits on your Snapchat shares, and not sold your Nikola shares. You would be taxed on that $500. But “harvesting” your losses on Nikola brought down your taxable gains.

Scenario #2

Say the market takes a big swing to the downside and some of your investments are now in the red. For example, your Microsoft shares are at a loss of -$400 and your Tesla shares are at a loss of -$300. If you sell all your shares for both companies you realize a loss of -$700. This $700 can be deducted from your taxable income at the end of the year. This is also “harvesting your losses” for tax purposes.

There is a rule you must follow though….

  • Once you sell your investment for a realized loss, you must wait 30 days to purchase the SAME asset again for the loss to be deducted from your taxes.
  • If you buy the same asset within 30 days you sold, you cannot write off the loss.

What most people do to avoid this rule is buy a similar asset once they sell, or they wait the 30 days. For example, sell Microsoft to buy Apple, sell Tesla to buy Ford.

You cannot tax harvest on ROTH or 401K accounts.

What are Stock Donations?

Any method to ditch capital gains tax is worth considering.  By donating stock gains, you are donating more money theoretically, due to the tax avoidance. 


Let’s say you bought a stock 14 months ago for $1,000 and now it is worth $1,800.  Your taxable gains would be the $800 profit, and 15% of this ($120) is gone to Uncle Sam.  Instead, donate these shares to a charity of your choice.  

It is important to make sure you actually donate the shares, and not the value of the shares.  If you sell the shares then donate the $1,800, the IRS will still come looking for their 15%.  If you donate the shares themselves, the IRS won’t bother you at all.  Plus, by donating the shares you are technically donating 15% more than you would have with the cash.

Why Should You Donate Stock Gains?

Now, you are donating an asset value of $1,800 to a charity, AND you are able to get an itemized tax deduction.  The IRS allows you to donate up to 50% of your gross income and still receive the deduction.  The charity will be grateful for your generosity, and you will be grateful that your tax liability is much lower.  

Obviously this is not a method you should conduct every time you are selling a position.  Philanthropy is a very noble practice, but I am not sure of many people who only want to donate their gains.  If you are ever feeling a philanthropic beat in your heart, consider donating your stock shares before straight up cash.

Closing Thoughts

Making money from investing is always exciting but paying taxes is not. Using the methods of Tax Harvesting, Charitable Donations, and Capital gains are a great start to avoiding unnecessary taxes, legally. Of course, there are plenty of other (legal) tax tricks you can do to push your gains even further! In the future, we will be covering other methods to avoid taxes but not just limited to stocks. There are plenty of methods to decrease your tax liability in real estate and your active income. We plan to cover these topics in depth in the near future so remember to subscribe to catch those posts!

Lastly, always make sure to consult a qualified tax professional to handle these tax maneuvers

Check Out Finance In Short

Check out another article: How Many Stocks Should You Hold?


Published by Samuel Jaffe

I have always been interested in the world of finance and its influence on economies around the world. I'm only 20 years old but learning more about finance everyday! I write about topics and events that I am interested in or I'm learning about. My hope is to give readers the same value I got when researching topics and event. Hopefully my articles give you as much value as I got in writing them!

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