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How to Manage Capital Gains Tax

How to Manage Capital Gains Tax

Too many people sell positions in their investment portfolio without fully thinking through, or optimizing, the tax consequences. It doesn’t have to be that way.

If you want to take a distribution without triggering gains, start by looking at selling positions with unrealized losses. (Remember, the tax impact needs to be weighed against the investment considerations, so this isn’t always an easy decision.) If you’re simply looking to rebalance your portfolio, consider doing so in qualified accounts (such as an IRA or 401k), which are shielded from taxes.

But there’s another, often overlooked, tax planning tool available to investors: The Specific Identification Method.

Here’s how it works:

When you hold an investment in a regular taxable brokerage account (also referred to as a “non-qualified” account), your “tax basis” is equal to the amount you initially paid for the stock. But more often than not, you didn’t purchase the investment at just one time. It may have been a series of purchases, perhaps over several years or decades. If the stock price rose over time (let’s hope!), then the more recently purchased shares could have a higher cost basis, and therefore a smaller unrealized gain.

When you look at your position on your statement or in your online portal, you’ll typically only see the total unrealized gain or loss. But a peak under the hood reveals multiple tax lots with varying tax positions. Some of your shares may have gains, some may have losses, some may be short-term positions, and others may be long-term positions.

When selling shares under the Specific Identification Method, you are allowed to select the specific tax lot to sell at that time. The other options are the Average Cost Method, First In First Out, and Highest In First Out, all of which give you less control and may result in selling less advantageous tax lots.

By hand-picking the tax lots that are most advantageous to sell, you will be able to reduce your position in a more tax efficient way.

For example, if minimizing current year tax is your goal, you could start by selecting lots with loss positions, then sell long-term positions with the smallest gains. Remember, it’s not always more advantageous to sell the shares with the highest tax basis because short-term gains are taxes at higher rates than long-term gains. In addition, there are certain situations where it may be better to recognize gains than losses (or minimizing gains). This could occur if someone had a large capital loss carryover that needed to be utilized or was in the 0% capital gains tax bracket.

Many people don’t realize that they have the ability to specify the tax lots when selling. By using this method, you’ll be able to rebalance or take portfolio distributions with much greater tax efficiency.

© 2025 Trailhead Planners

Trailhead Planners, LLC (“Trailhead”) is a registered investment advisor offering advisory services in the States of Oregon, Minnesota, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.

The information on this site is not intended as tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Trailhead Planners, LLC, disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.

Trailhead does not warrant that the information on this site will be free from error. Your use of the information is at your sole risk. Under no circumstances shall Trailhead be liable for any direct, indirect, special, or consequential damages that result from the use of, or the inability to use, the information provided on this site, even if Trailhead or a Trailhead authorized representative has been advised of the possibility of such damages. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

© 2025 Trailhead Planners

Trailhead Planners, LLC (“Trailhead”) is a registered investment advisor offering advisory services in the States of Oregon, Minnesota, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.

The information on this site is not intended as tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Trailhead Planners, LLC, disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.

Trailhead does not warrant that the information on this site will be free from error. Your use of the information is at your sole risk. Under no circumstances shall Trailhead be liable for any direct, indirect, special, or consequential damages that result from the use of, or the inability to use, the information provided on this site, even if Trailhead or a Trailhead authorized representative has been advised of the possibility of such damages. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

© 2025 Trailhead Planners

Trailhead Planners, LLC (“Trailhead”) is a registered investment advisor offering advisory services in the States of Oregon, Minnesota, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.

The information on this site is not intended as tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Trailhead Planners, LLC, disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.

Trailhead does not warrant that the information on this site will be free from error. Your use of the information is at your sole risk. Under no circumstances shall Trailhead be liable for any direct, indirect, special, or consequential damages that result from the use of, or the inability to use, the information provided on this site, even if Trailhead or a Trailhead authorized representative has been advised of the possibility of such damages. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.