Capital gains taxes are one of the most overlooked risks for high-income earners. Missteps in this area can lead to disproportionately large tax bills for individuals with complex portfolios, multiple income streams, and significant appreciated assets.
Unfortunately, many high-net-worth individuals only realize the consequences after a costly filing.
Let’s explore the most common capital gains mistakes — and how proactive planning can protect your wealth and legacy.
Mistake 1: Misunderstanding Short-Term vs. Long-Term Gains
One of the simplest yet most expensive mistakes is misunderstanding the difference between short-term and long-term capital gains taxes.
Short-term gains — profits from assets held less than a year — are subject to typical income tax rates, which can reach 37% for high earners. In contrast, long-term gains have lower rates, topping out at 20% for most high-income individuals.
Selling a stock shy of the one-year mark could mean paying nearly double the tax rate. For high-net-worth individuals, this difference could result in significant financial losses.
The fix: Careful timing of asset sales can help qualify gains for favorable long-term tax rates. Reviewing holding periods and coordinating sales with a knowledgeable tax professional or wealth advisor is essential to preserving your yearly income.
Mistake 2: Forgetting to Harvest Losses
Capital gains aren’t just about profits — they also intersect with your losses. Many investors overlook tax-loss harvesting, intentionally selling low performing investments to offset gains somewhere else in the portfolio.
Without this step, you might leave valuable tax savings on the table.
Consider this: if you realize $500,000 in gains but fail to offset with $100,000 in eligible losses, you could be paying capital gains tax on the full amount rather than a reduced balance.
The fix: Proactively reviewing your portfolio near year-end can uncover loss harvesting opportunities to reduce your tax liability. Engaging with a trusted wealth advisor helps you execute these strategies in alignment with your broader investment goals.
Mistake 3: Ignoring the Net Investment Income Tax (NIIT)
Net Investment Income Tax (NIIT) applies to individuals earning above $200,000 (or $250,000 for married couples filing jointly). This 3.8% surtax applies to capital gains, dividends, rental income, and other investment income.
Many high-income earners neglect to account for NIIT when selling appreciated assets, leading to underpayment or surprise liabilities at tax time.
The fix: Evaluating the total tax impact of a large sale, including exposure to NIIT, can help you avoid unexpected tax bills. Working with a tax advisor can support smarter timing and structuring of investment income.
Mistake 4: Overlooking Step-Up in Basis at Death
A step-up in basis allows heirs to reset the cost basis of inherited assets to their market value at the time of death, effectively erasing prior capital gains.
Selling highly appreciated assets during your lifetime could mean paying unnecessary taxes instead of preserving this powerful benefit. Improperly timing sales is a typical error in self-managed portfolios, where well-meaning individuals liquidate assets without understanding the estate tax interplay.
The fix: Integrating tax and estate planning can help preserve the step-up benefit and reduce tax exposure for your heirs. Coordinating financial, legal, and tax considerations is essential to optimize legacy outcomes.
Mistake 5: Selling Without Coordinating Across Advisors
A large asset sale rarely stands in isolation. Selling real estate, business shares, or sizable stock positions has a cascading tax effect. Yet many high-income earners make these moves without consulting their CPA, estate attorney, and financial advisor collectively.
The result? Triggered alternative minimum taxes (AMT), state-specific surcharges, or missed deductions.
The fix: Bringing your advisory team together before major transactions can prevent costly missteps. Collaborative planning ensures tax, legal, and financial strategies are aligned to support your long-term goals.
Bonus Mistake: Assuming Capital Gains Only Apply to Stocks
Capital gains taxes apply to more than the stock market. High-income individuals often hold appreciated real estate, private equity, artwork, or cryptocurrency, each with unique tax implications. Treating them all the same risks significant oversights.
The fix: Reviewing your entire portfolio, including alternative and illiquid assets, ensures no tax opportunities or liabilities are overlooked. Comprehensive planning across all asset types can help minimize taxes and preserve wealth.
Avoid Capital Gains Mistakes and Protect Your Legacy Through Proactive Planning
Capital gains mistakes can undermine years of thoughtful wealth building. By addressing these common pitfalls proactively, high-income earners can retain more wealth, reduce stress, and ensure their financial vision remains intact.
At Bradley Wealth, we don’t just manage investments. We guide you toward holistic, intentional financial choices that honor your values and legacy.
Discover your true wealth — schedule a private consultation.
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