How to Avoid Paying Taxes on Your Brokerage Account

You can legally reduce or even eliminate federal tax on a taxable brokerage account, and knowing how to avoid paying taxes on your brokerage account comes down to a handful of levers: hold positions long enough to qualify for lower rates, offset gains with losses, pick investments that throw off less taxable income, and, in some cases, transfer appreciated shares out of your account without selling. For 2026, a single filer with taxable income at or below $49,450 pays a 0 percent federal rate on long-term capital gains. Higher earners can still cut their effective rate well below what they pay on wages if they use the rules below.

Hold Investments More Than One Year

The biggest lever most investors have is patience. Sell a stock or fund you’ve owned for a year or less and the profit is a short-term gain, taxed at your ordinary income rate, which tops out at 37 percent in 2026. Hold for more than one year and the same profit becomes a long-term gain, taxed at 0, 15, or 20 percent.¹

The 2026 long-term capital gains brackets by filing status:

0 percent rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
15 percent rate: taxable income from $49,451 to $545,500 (single), $98,901 to $613,700 (married filing jointly), or $66,201 to $579,600 (head of household).
20 percent rate: taxable income above those upper thresholds.

Most investors land in the 15 percent bracket, already a meaningful discount against the 22 or 24 percent ordinary rates that would apply to the same income. Before selling a winner, check the purchase date. Waiting a few weeks to cross the one-year mark can save thousands on a single trade.

Harvest Losses to Offset Gains

When some positions are down, selling them creates realized losses that offset gains from your winners. If total capital losses exceed total capital gains for the year, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Anything beyond that carries forward indefinitely.²

The math is straightforward. Sell one holding for a $50,000 long-term gain and another at a $30,000 loss in the same year, and you owe tax on the net $20,000. You report the calculation on Schedule D of Form 1040.³

The Wash Sale Rule

There’s a catch. Sell a security at a loss and buy back a “substantially identical” investment within 30 days before or after the sale, and the IRS disallows the loss. That 61-day window is the wash sale rule. The disallowed amount gets added to the cost basis of the replacement shares, so the benefit is deferred rather than destroyed.⁴

What counts as “substantially identical” isn’t always obvious. Selling one S&P 500 index fund and buying another provider’s S&P 500 fund the next day likely triggers the rule since both track the same index. Buying a broader total-market fund during the 30 days, or simply waiting the full window before repurchasing, avoids the problem.

Don’t Rebuy in an IRA

One trap catches investors off guard. Buying the replacement shares inside a traditional or Roth IRA still triggers a wash sale, and because IRAs don’t track individual cost basis the way taxable accounts do, the disallowed loss isn’t added to any basis at all. It’s gone. The IRS confirmed this in Revenue Ruling 2008-5.⁵

Choose Tax-Efficient Funds

The type of fund you hold in a taxable account matters almost as much as what you do with it. Two funds tracking the same index can deliver nearly identical pre-tax returns but wildly different tax bills, because of how each structure handles redemptions.

When a mutual fund investor sells shares, the fund often needs to sell underlying holdings to raise cash. If those holdings have appreciated, the fund realizes capital gains that get distributed to every remaining shareholder, including investors who didn’t sell anything. In 2025, roughly 52 percent of mutual funds paid a capital gains distribution, compared with just 7 percent of ETFs. The long-term average since 2016 is 53 percent for mutual funds versus 9 percent for ETFs.⁶

ETFs sidestep this through in-kind creation and redemption. Large investors redeem shares by receiving underlying securities directly, so the fund doesn’t sell to raise cash and gains don’t flow through to shareholders. Your tax bill comes mostly when you decide to sell your own ETF shares.

Turnover compounds the difference. An actively managed fund can churn through 100 percent or more of its holdings a year, generating short-term gains taxed at ordinary rates. A broad-market index ETF might turn over 2 to 4 percent. For a taxable account, a low-turnover index ETF is generally the most tax-efficient vehicle available.

Pick the Right Cost Basis Method

When you sell shares you accumulated over time at different prices, the cost basis you use determines the size of your gain. Most brokerages default to first-in, first-out (FIFO), which sells your oldest shares first. In a rising market those are your lowest-basis shares, producing the largest possible gain.

You can choose specific share identification instead, telling your broker exactly which lots to sell. Selecting the highest-cost lots minimizes the gain, or maximizes the loss, on each sale. You have to specify the shares at the time of sale and get written confirmation from the broker.⁷

Most online brokerages make this easy. You can set the default to “highest cost” or pick lots manually when placing a sell order. Consistently selling your highest-cost shares first meaningfully reduces annual tax bills without changing your investment strategy at all.

Aim for Qualified Dividends

Not all dividends are taxed the same. “Qualified” dividends receive the same preferential 0, 15, or 20 percent rates as long-term capital gains, while “ordinary” dividends get your regular income rate. For someone in the top bracket, that’s a difference of 17 to 37 percentage points on the same dollar.⁸

To qualify, you must hold the stock more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. You can’t buy a stock the day before its dividend, collect the payout, and sell the next week at the lower rate.

Some payments never qualify. Distributions from real estate investment trusts and most payments from master limited partnerships are taxed as ordinary income because of how those entities are structured. Foreign corporation dividends qualify only if the company is incorporated in a U.S. treaty country or if its stock trades on a U.S. exchange, and passive foreign investment companies are excluded entirely. Your year-end 1099-DIV shows how much of your dividend income qualified.⁹

Use Municipal Bonds for Tax-Free Interest

Interest from bonds issued by state and local governments is generally exempt from federal income tax, regardless of your income level.¹⁰

For someone in the 37 percent bracket, a municipal bond yielding 3.5 percent delivers roughly the same after-tax return as a taxable bond yielding about 5.6 percent. The higher your bracket, the more valuable the exemption. Many investors get a state tax break too when they buy bonds issued within their home state.

Two boundaries worth knowing. The exemption covers interest only. Sell a muni for more than you paid and the profit is a taxable capital gain like any other security. And interest from certain private activity bonds (those financing airports, housing projects, or industrial facilities) counts as a preference item for the Alternative Minimum Tax. If you’re subject to the AMT, some of that “tax-free” interest may not actually be free.¹¹

Use Treasuries for State Tax Savings

Interest on U.S. Treasury bonds, notes, bills, and savings bonds is taxable at the federal level but exempt from all state and local income taxes. Federal law establishes the exemption and overrides state taxing authority.¹²

The value depends on where you live. In a no-income-tax state it’s irrelevant. In a high-tax state, the exemption can be worth half a percentage point or more in additional after-tax yield compared with a corporate bond paying the same rate. Treasury ETFs and Treasury-only money market funds pass the state tax exemption through to shareholders.

Donate Appreciated Shares Instead of Cash

If you’re planning a charitable gift, transferring appreciated stock or fund shares directly is almost always better than selling first and donating the proceeds. On a long-term appreciated security given to a qualified charity, you avoid the capital gains tax on the built-in appreciation and deduct the full fair market value of the shares.

If you’ve held the asset more than a year, the deduction equals market value on the date of the gift, capped at 30 percent of your adjusted gross income for the year. Amounts over the cap carry forward for up to five years.¹³

If you’ve held the asset a year or less, the deduction drops to your original cost basis, which erases most of the advantage. The strategy works best on positions with large embedded gains where selling would trigger a big tax bill. Donating shares you bought at $5 that are now worth $50 saves far more than donating $50 in cash.

Donor-Advised Funds

A donor-advised fund acts as a charitable holding account. You contribute appreciated securities, take the deduction in the year of the contribution, and recommend grants to specific charities over time. It’s useful when a large one-time gain lines up with a year you want to concentrate deductions, then distribute the money gradually. The fund is a public charity, so the 30 percent AGI limit for appreciated property applies.¹³

Watch the 3.8 Percent Net Investment Income Tax

On top of regular capital gains and dividend taxes, higher-income investors face an additional 3.8 percent surtax on net investment income. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).¹⁴

Net investment income includes capital gains, dividends, interest, rental income, and royalties. It does not include wages, Social Security benefits, or most self-employment income. The thresholds aren’t indexed for inflation, so more taxpayers cross them each year.¹⁵

The practical effect: a high-income single filer in the 20 percent long-term capital gains bracket actually pays 23.8 percent on those gains. Every strategy above that reduces net investment income or modified AGI also reduces NIIT exposure. Loss harvesting, municipal interest (which is excluded from net investment income), and spreading large sales across tax years all help.

Let Appreciated Positions Pass at Death

Brokerage accounts carry one built-in advantage that retirement accounts don’t: a step-up in basis at death. When the owner dies, the cost basis of the holdings resets to fair market value on the date of death. All the accumulated capital gain disappears for tax purposes.¹⁶

The mechanics matter. Buy stock for $10,000, hold it until it’s worth $100,000 at your death, and your heir inherits with a $100,000 basis. If the heir sells immediately at that price, no capital gains tax is owed. The $90,000 in appreciation is never taxed. If instead you sold the day before you died, tax would be due on the full $90,000.

For older investors and anyone doing estate planning, this argues for holding highly appreciated positions rather than selling them. If income is needed, drawing from positions with smaller gains and leaving the big winners for heirs preserves the benefit.

Community Property Double Step-Up

Married couples in community property states get a better version. When one spouse dies, both halves of community property receive the stepped-up basis, not just the deceased spouse’s half. In a separate property state, only the decedent’s share resets. This doubles the benefit for the surviving spouse in the nine community property states.¹⁷

1
Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
4
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
5
Internal Revenue Service. Rev. Rul. 2008-5
6
State Street Investment Management. Tax Efficiency Is Structural: ETFs Continue to Issue Fewer Capital Gains Than Mutual Funds
7
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
8
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed – Section: Maximum Capital Gains Rate
9
Internal Revenue Service. Instructions for Form 1099-DIV
10
Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds
11
Office of the Law Revision Counsel. 26 US Code 57 – Items of Tax Preference
12
Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation
13
Internal Revenue Service. Publication 526 (2025), Charitable Contributions
14
Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax
15
Internal Revenue Service. Net Investment Income Tax
16
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
17
Office of the Law Revision Counsel. href=”https://uscode.house.gov/view.xhtml?req=(title:26%20section:1014%20edition:prelim)” target=”_blank” rel=”noopener”>26 US Code 1014 – Basis of Property Acquired From a Decedent