How to Avoid Common Capital Gains Tax Mistakes

29 May 2025

Nobody likes paying more taxes than they have to, but when it comes to capital gains tax (CGT), many people make avoidable mistakes that cost them dearly. The good news? With a little bit of knowledge and planning, you can steer clear of these common pitfalls and keep more of your hard-earned money.

In this article, we'll break down the most frequent capital gains tax mistakes people make—and how you can avoid them. So, whether you're selling stocks, real estate, or other investments, you’ll know what steps to take to minimize your tax liability.

What is Capital Gains Tax?

Before we dive into the mistakes, let's quickly clarify what capital gains tax actually is.

Capital gains tax is what you owe when you sell an asset—whether that’s real estate, stocks, or other investments—for more than you paid for it. The difference between the purchase price (cost basis) and the sale price is the capital gain, which is then taxed at either short-term or long-term rates.

- Short-term capital gains: Taxed as ordinary income (if you hold the asset for one year or less).
- Long-term capital gains: Taxed at a lower rate than ordinary income (if you hold the asset for more than one year).

Now that we’ve got that covered, let’s move on to the mistakes you should avoid.

1. Selling Assets Too Soon

Timing matters when it comes to capital gains tax. If you sell an investment less than one year after buying it, your gains will be taxed at ordinary income tax rates, which are usually much higher than long-term capital gains rates.

How to Avoid This Mistake

Whenever possible, hold onto your investments for at least one year and one day before selling. This simple strategy can significantly reduce the tax rate you pay on your profits.

2. Forgetting to Offset Gains with Losses (Tax-Loss Harvesting)

Did you know you can use investment losses to offset your taxable gains? Many people either forget or don’t take advantage of this smart tax-saving strategy called tax-loss harvesting.

How to Avoid This Mistake

If you have a mix of winning and losing investments, consider selling some of your losing investments to offset your gains. You can deduct up to $3,000 in net losses per year against your regular income, and any excess losses can be carried forward to future years.

3. Not Factoring in Capital Gains Tax When Selling Property

When selling real estate, people often forget about the tax consequences. The IRS doesn’t just look at the selling price, but also how much profit you made on the sale.

How to Avoid This Mistake

- If selling your primary residence, remember that the IRS allows you to exclude up to $250,000 of gains if you’re single (or $500,000 if you're married and filing jointly) from taxation—provided you’ve lived in the home for at least two out of the last five years.
- If you’re selling an investment property or second home, you may want to use a 1031 exchange to defer paying taxes by reinvesting your proceeds into another property.

4. Ignoring the Impact of State Taxes

Many people focus solely on federal capital gains tax and forget that state taxes can also take a bite out of their profits. Some states don’t tax capital gains at all, while others treat them the same as regular income.

How to Avoid This Mistake

Before selling an asset, check your state’s tax laws. If you live in a high-tax state, it might be worth considering relocating before realizing large gains.

5. Not Keeping Proper Records

Imagine selling a stock you purchased years ago and not remembering what you paid for it. Without those records, the IRS may assume your entire sale price is profit—leading to a higher tax bill than necessary.

How to Avoid This Mistake

- Keep track of dates and purchase prices for all investments.
- Save brokerage statements, property closing documents, and any records related to improvements or dividends reinvested.

Good record-keeping ensures you can correctly calculate your taxable gain, helping you avoid overpaying in taxes.

6. Overlooking the Net Investment Income Tax (NIIT)

If you have significant income from investments, you may be subject to an extra 3.8% Net Investment Income Tax (NIIT) on top of your regular capital gains tax. Many high earners forget this additional tax until they see their final tax bill.

How to Avoid This Mistake

The NIIT applies to single filers earning over $200,000 and married couples earning over $250,000. If this applies to you, consider strategies like charitable giving, tax-loss harvesting, or spreading out large gains over multiple years to minimize the impact.

7. Failing to Consider Step-Up in Basis for Inherited Assets

If you inherit stocks or real estate, your taxable gain is based on the asset’s value at the time of inheritance, not what the original owner paid for it. This benefit, called a step-up in basis, can significantly reduce your tax liability.

How to Avoid This Mistake

If you're inheriting an asset, don’t rush to sell it. First, determine the step-up value based on the fair market price at the time of inheritance. This can help reduce or even eliminate capital gains tax when you sell.

8. Ignoring Retirement Account Benefits

Selling investments inside a tax-advantaged retirement account (like an IRA or 401(k)) typically doesn’t trigger capital gains tax. However, withdrawing funds from these accounts improperly can lead to unnecessary tax burdens.

How to Avoid This Mistake

- Use Roth IRAs if you want tax-free withdrawals in retirement.
- Avoid early withdrawals from traditional IRAs and 401(k) accounts to prevent penalties and higher tax rates.
- Consider tax-efficient asset location, meaning holding growth investments in taxable accounts and income-producing assets in tax-advantaged accounts.

9. Misunderstanding Gift and Estate Tax Rules

Giving away assets during your lifetime can be a smart tax-saving strategy, but many people don’t realize the tax implications of gifting investments, stocks, or property.

How to Avoid This Mistake

- You can gift up to $18,000 per person per year (as of 2024) without triggering gift tax reporting.
- If gifting highly appreciated assets, the recipient inherits your cost basis, meaning they may owe significant capital gains tax when they sell.
- If your estate is large, consider strategic gifting and trusts to minimize estate tax exposure.

Final Thoughts

Capital gains tax can be tricky, but by avoiding these common mistakes, you can keep more of your profits where they belong—in your pocket. Whether you’re selling stocks, real estate, or other investments, a little planning goes a long way in reducing your tax bill.

Need personalized advice? Consider consulting a tax professional to develop a strategy that’s tailored to your unique financial situation. After all, the less you pay in taxes, the more you can reinvest and grow your wealth!