3 Strategies to Manage Large Capital Gains

Bethany A. Lardaro, CFP®
Vice President, Wealth Advisor
Washington Trust Wealth Management

Investors, even those with a long-time horizon, will encounter situations where selling stock makes sense. When the stocks you sell surge in value, so do your capital gains—and the potential for dreaded capital gains taxes. Your strategy in managing large capital gains shifts with your priorities and stages of life. Three key strategies can help mitigate your tax exposure while aligning with your broader financial goals. (See our February blog for strategies for real estate capital gains.)

Use Tax Loss Harvesting 

Tax loss harvesting allows you to sell assets that have declined in value to offset gains from profitable investments. This can be a valuable strategy to reduce concentrated positions within your portfolio in a tax efficient manner. As we have seen sizable gains in concentrated areas of the market—e.g., the "Magnificent Seven" (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla), artificial intelligence, and growth-oriented companies—temporary declines in other sectors can create an opportunity to offset those gains.

Particularly during periods of market volatility, tax loss harvesting allows you to turn temporary declines into long-term tax advantages without altering your investment strategy significantly. Even if your harvested losses exceed your gains in a given year, you can use up to $3,000 of the excess to offset ordinary income.ⁱ Any remaining losses carry forward indefinitely, giving you a bank of future tax benefits.

Leverage Charitable Giving 

Charitable giving can be a win-win strategy when managing capital gains. Instead of donating cash, consider giving appreciated securities you’ve held for more than a year. You’ll avoid paying capital gains tax on the appreciation and you may receive a charitable deduction for the fair market value of the securities, subject to income limitations.

If you don’t itemize deductions every year, consider bunching and batching donations into a single tax year. By concentrating multiple years’ worth of charitable giving into a single year, you may exceed the standard deduction threshold and see an overall tax savings.

A popular way to do this is by using a donor-advised fund (DAF). You can contribute appreciated assets to a DAF in a high-income year, claim the full deduction immediately, and then recommend grants to charities over time. This approach allows you to maximize your tax benefit in the year it counts most, while giving you flexibility to support the organizations you care about at your own pace.

Plan for the Step-Up in Basis at Death

If you have appreciated assets you don’t need to sell for income during your lifetime, you may want to hold them, so they pass to your heirs at your death. Under current tax law, when you pass away, the cost basis of assets in your taxable account resets to their fair market value. This means your heirs inherit those assets without the imbedded capital gain you accrued during your lifetime.ⁱⁱ

For instance, if stock you bought for $50,000 is worth $200,000 when you pass away, your heirs’ basis would “step up” to $200,000. If they sold it the next day for $200,000, there would be no taxable gain.

This strategy can be especially beneficial for highly appreciated assets as part of your overall estate plan. 

Washington Trust Wealth Management Can Help

Wherever you are in your financial journey, managing large capital gains is an important part of your overall wealth plan. Your experienced advisors at Washington Trust are here to guide those thoughtful conversations, keep you updated on changes in tax laws, and help you make decisions that will enable you to enjoy the rewards of your investment success while keeping more of your wealth for the future.