Don’t Forget About Capital Gains! Ways to help limit the effect of taxes on gains from your portfolio.

You likely hope the investments you hold will rise in value. Still, you have to be aware of how increases in the value of your investments can trigger a tax bill when you sell the investment. Capital gains are generally the profits you realize when you sell an investment for more than you paid for it, whereas capital losses are generally the losses you realize when you sell an investment for less than you paid for it. 
When you have a capital gain, you may have to pay capital gains taxes. These tax rates can depend on how long you held the asset. Generally, if you hold an asset for more than a year it’s considered a long-term holding, while investments you sold in a year or less are considered short-term. Generally, the tax rate is higher on a short-term holding.
There are moves you can make to help reduce or mitigate the amount of taxes you will pay on your capital gains, including holding assets longer, tax-loss harvesting and choosing tax-favorable investments.
Delay Selling the Asset
There are several ways to defer tax payments on gains and potentially increase your overall investment return. One method is simply to delay selling an asset that is rising in value. Due to potential asset appreciation, the longer you defer the realization of those gains by holding onto the asset, the greater your after-tax return could be, provided your assets continue to grow in value. Paying less in taxes may result in higher after-tax returns over time.
Tax-Loss Harvesting
Current U.S. tax law allows you to offset your capital gains with capital losses you’ve incurred during that tax year, or with capital losses carried over from a prior tax return. Let’s say that you earn a profit of $30,000 by selling your shares of Fund A. Meanwhile, your shares of Fund B are down by $15,000. By selling Fund B, you can use those losses to partially offset your gains from Fund A—meaning you’d only owe taxes on $15,000 of profit instead of $30,000. Note that if you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of ordinary income. Any excess net capital loss can be carried over to subsequent years to offset future capital gains or ordinary income up to $3,000 per year.
Generally, short-term capital gains are taxed at a higher rate (up to a maximum rate of 37%) than long-term capital gains, which are taxed at a maximum rate of 20%. So, to the extent possible, tax-loss harvesting can likely make a bigger difference if you have invested in strategies that see high turnover and thus more short-term gains.
Consider Tax-Advantaged Investment Options
Another way to try to reduce the expected taxable realized gains from your investment portfolio is by considering tax-advantaged investment options. For example, the interest on municipal bonds is typically free from federal, state and local taxes. Certain investment products, such as tax-efficient mutual funds or municipal bonds, either offer potential tax benefits or are managed to limit the number of taxable events within the portfolio.
With so many choices to make, it can be easy to overlook potential ways to reduce the amount of taxes on your capital gains. A Financial Advisor can help you assess the available options as well as provide guidance on a broader investment strategy that’s tailored to your individual financial goals.
Brian P. Jacobs is a Wealth Advisor in Valencia CA at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at brian.jacobs@morganstanley.com or by telephone at (661)290-2022.
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