Taking Advantage of the 0% Capital Gains Bracket

How to sell your investments without owing federal taxes.

Everyone loves to complain about taxes, but few people really understand how they work or how generous a lot of tax breaks can be. The greatest tax break IMO is the Roth IRA, and by extension, the Roth 401(k). You can pay taxes once and the entire account is sheltered from taxes forever. If you shovel enough money in consistently and early enough, you can easily accumulate millions of dollars of tax-free wealth by the time you retire.

You can also reduce your taxable income in the current year by contributing to a pre-tax plan like a 401(k) or a SEP-IRA. If your income is high now but will be lower in the future, the tax planning opportunities are immense.

But another area that gets overlooked is regular taxable investments, which are subject to capital gains taxes. A capital gain is any profit from the sale of an asset. This could be a stock, mutual funds, real estate, a business or anything you sell for more than you paid. The tax code grants far more favorable treatment to long-term capital gains than it does to short-term capital gains. A long-term capital gain applies to any asset held for more than a year while a short-term capital gain applies to assets held for less than a year.

While short-term capital gains rates correspond to ordinary income tax rates — 10%, 12%, 22%, 24%, 32%, 35% and 37% — long-term capitals have their own brackets that allow you to pay far less in taxes if you can wait at least a year before selling. There are three long-term capital gains brackets: 0%, 15% and 20%.

While it’s notable that long-term capital gains rates have a ceiling of 20% (compared to 37% for short-term rates), that 0% rate presents an opportunity for serious tax savings with proper planning.

Too many people take for granted that selling investments inside a taxable brokerage account (as opposed to a tax-advantaged account) means paying taxes on those gains, but this isn’t necessarily true — if you are in that 0% bracket. So let’s look at some numbers. These are the long-term capital gains tax rates for 2024 and 2025:

Because 2024 is almost over, I’ll be using 2025 numbers for the rest of this post.

What this means is that if you are single and your total taxable income is $48,350, you will pay 0% in long-term capital gains while a couple filing jointly would avoid capital gains ​​on $96,700 of taxable income. There are two additional considerations. First, total taxable income includes any capital gains you have. Second, you can also take into account the standard deduction (or itemized deduction) and any other tax deduction (such as contributions to a pre-tax retirement account) which can reduce taxable income and free up space to fill up the 0% bucket.

The IRS considers ordinary income first and then capital gains when calculating taxes. Any capital gains that fall within the exclusion get the 0% tax treatment. Any capital gains in excess of the exclusion fall into the 15% and eventually the 20% brackets. This is good because you want ordinary income, which has the potential to be taxed at a higher rate, to fill up the lower income brackets before capital gains, which are taxed at lower rates.

To determine how much in capital gains you can realize without owing taxes, we can use this simple formula:

0% threshold - (ordinary income - standard deduction - other deductions) = capital gains taxed at 0%

If this number is positive, that’s the amount of capital gains you can realize without paying any tax.

Let’s look at some examples.

Example 1

A couple earns a combined $100,000 of ordinary income and has $200,000 in a taxable brokerage account. The investments have a cost basis of $150,000, meaning that if they sell them, there will be a $50,000 capital gain.

The couple takes the standard deduction of $30,000 and reduces their taxable income to $70,000. They also make a $20,000 contribution to a 401(k), further reducing their taxable income to $50,000. Suddenly, there’s a lot of room to sell investments without going past the $96,700 limit for 0% in capital gains. In fact, this couple can realize $46,700 in gains without paying any tax.

$96,700 - ($100,000 - $30,000 - $20,000) = $46,700

If they sell all of their investments, some of their capital gains will be subject to the 15% tax bracket, specifically $3,300.

Example 2

A single filer decides to take a one-year sabbatical from their career. Their ordinary income is $0, but they have enough taxable investments to sustain their lifestyle during the sabbatical year. While the 0% threshold is technically $48,350, they can still take into account the $15,000 standard deduction, meaning this person can realize $63,350 in long-term capital gains without owing tax.

$48,350 - ($0 - $15,000 - $0) = $63,350

Example 3

A couple earns $173,700 in ordinary income. They take the standard deduction and contribute $23,500 to each of their 401(k)s.

$96,700 - ($173,700 - $30,000 - $23,500 - $23,500) = $0

This couple has no room to sell investments at the 0% bracket at this point, as they are already at the threshold. Any investments they sell will be subject to at least the 15% tax (they would need to have more than $600,050 in total taxable income to break into the 20% bracket).

Tax-Gain Harvesting

The 0% bracket allows you to sell investments without paying any taxes. This sounds great if you already planned to sell, but what if you’re buying and holding investments in a taxable account? You should consider selling them anyway.

The most commonly discussed tax strategy for investments — tax-loss harvesting — involves selling stock for a loss and deducting that loss against income. If you have a $500 loss, you can sell the stock or fund and deduct it from your taxes. There are some caveats: You must be mindful of the wash sale rule, which prohibits you from buying shares of an investment sold at a loss within 30 days, and you can only deduct up to $3,000 in losses a year.

But most individuals are more likely to benefit from the opposite — tax-gain harvesting. This is when you take a paper gain, realize that gain by selling shares, and then immediately buy back into the investment to reset your cost basis. This really only works with liquid investments in a taxable account that you can easily trade in and out of.

If you purchase $80,000 worth of shares in an S&P 500 ETF and your investment grows to $100,000, calculating the gain is as simple as taking the current value and subtracting the cost basis, or the original purchase price. In this case, you take $100,000 and subtract $80,000, getting $20,000 in gains. If you find yourself at least $20,000 below the 0% tax threshold of $96,700 (married) or $48,350 (single) after deductions, you can sell your investment, owe no tax and your new cost basis for calculating future gains will be $100,000.

This is actually what happens when you die. Your investments step up in basis to the fair market value, allowing your heirs to use the new basis at the time of your death to avoid any capital gains that would have otherwise been created by selling the investments. Except in this case, proper planning means no dying required!

How to Optimally Employ This Strategy

Tax-gain harvesting is best done at the end of the year when you have a clearer picture of what your total income will be. Harvest gains too early and your ordinary income may bump you into the 15% bracket, completely negating any benefit. If you want to fully maximize this strategy, you could sell as many of your investments held for more than a year as you can right up to the threshold.

Of course, the investments you sell can’t be in the negative, so this strategy is best pursued during a bull market. Given that that’s where we are now, this could present an opportunity for many people.

Income is probably the biggest potential obstacle. Some people’s income will normally be well above the threshold for the 0% bracket, but if this is you, there may still be opportunities as your life circumstances fluctuate. One opportunity could be a year in which you are unemployed or take a career sabbatical. Another could be early retirement years before you start claiming Social Security and need to take RMDs.

Another consideration is this strategy only applies to federal taxes. Many states don’t distinguish between short-term and long-term capital gains and simply tax all of them as income. So even if you pay 0% in federal capital gains taxes, you may still owe state income taxes.

As with any strategy, you want to take a holistic look at your finances to make sure it isn’t hurting you in other areas. One pitfall is that higher taxable incomes can disqualify you from receiving certain deductions, tax credits and other benefits. It could mean losing out on ACA subsidies, increased Medicare premiums or reduced college financial aid. If you’re worried about any of these things it may be best to work with a financial planner.

The 0% long-term capital gains bracket is one of the most overlooked tax benefits and presents a major opportunity for reducing taxable income on investments. Almost every taxpayer is likely to have a year in which they can take advantage of it, so long as they have a good understanding of their overall income picture.