Capital Gains
Understanding how capital gains are taxed — and how to minimize or eliminate that tax — is one of the most powerful tools in the FI toolkit.
Long-Term vs Short-Term Capital Gains
The holding period determines everything about how your gains are taxed.
Short-Term (Under 1 Year)
Gains on assets held for one year or less are taxed as ordinary income. That means rates as high as 37% for high earners.
Long-Term (Over 1 Year)
Gains on assets held for more than one year receive preferential rates. The magic threshold: exactly 1 year + 1 day. Rates: 0%, 15%, or 20% — dramatically lower than ordinary income rates.
The 0% Long-Term Capital Gains Bracket
Early retirees' secret weapon: selling investments completely tax-free. 2024 thresholds.
| Rate | Single | Married Filing Jointly |
|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 |
| 15% | $47,026 - $518,900 | $94,051 - $583,750 |
| 20% | Over $518,900 | Over $583,750 |
After leaving traditional employment, earned income drops to zero. With low taxable income, many early retirees can sell appreciated investments and pay 0% on the gains.
Tax-Loss Harvesting
Turn investment losses into tax savings without changing your portfolio.
Identify Investments Trading at a Loss
Look for holdings in your taxable brokerage account where the current value is below what you paid. This is your "paper loss" — it only becomes a tax loss when you sell.
Sell the Losing Position
Sell the investment to "realize" the loss. This creates a capital loss that can offset capital gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 against ordinary income.
Buy a Similar (Not Identical) Replacement
Immediately reinvest in something similar but not "substantially identical." For example, sell a total stock market fund and buy an S&P 500 fund. Your portfolio stays virtually the same.
Carry Forward Unused Losses
Any losses beyond your gains + $3,000 carry forward indefinitely. A big market downturn can create years of tax-loss harvesting benefits that you use gradually over time.
The Wash Sale Rule
The IRS guardrail that prevents gaming the system — and how to work within it. The wash sale rule says you can't claim a loss if you buy a substantially identical security within 30 days before or after the sale.
What Triggers a Wash Sale
- Buying the same stock/fund within 30 days
- Buying it in a different account (including IRA)
- A spouse buying the same security
- Buying an option on the same security
Safe Swap Examples
- VTI (total market) → VOO (S&P 500)
- VXUS → IXUS (different fund families)
- Vanguard fund → Fidelity equivalent
- ETF version → mutual fund version (same index)
FI-Specific Capital Gains Strategies
Advanced techniques the FI community uses to minimize capital gains tax.
Harvest During Accumulation
Don't wait for a crisis. Any time an investment dips below your cost basis, consider harvesting the loss. During market corrections, harvest aggressively — those losses carry forward indefinitely.
Asset Location Optimization
Place tax-inefficient investments (bonds, REITs) in tax-advantaged accounts and tax-efficient investments (index funds) in taxable accounts. This "asset location" can add 0.2-0.5% annually.
Donate Appreciated Shares
Instead of selling appreciated stock and donating cash, donate the shares directly to charity. You get the full market value deduction and neither you nor the charity pays capital gains tax.
Harvest Gains at 0%
In early retirement with low income, strategically sell and rebuy investments to reset your cost basis higher. You pay 0% on the gains and reduce future tax liability when you eventually sell at higher income levels.
Continue Your Tax Education
Deep-dive into the strategies that save FI seekers the most.