Capital Gains Tax Planning: Timing, Harvesting, and QSBS Exclusion

Short-Term vs. Long-Term: The Rate Difference

The single most powerful capital gains strategy is simply holding assets for more than 12 months. Short-term gains (held 12 months or less) are taxed as ordinary income — up to 37%. Long-term gains (held more than 12 months) are taxed at preferential rates:

A high earner selling appreciated stock with a $100,000 gain: short-term = up to $37,000 in federal tax. Long-term (held 12+ months) = $23,800 maximum (20% + 3.8%). Savings: $13,200+ simply by waiting.

Tax-Loss Harvesting

Tax-loss harvesting is selling investments at a loss to offset capital gains realized elsewhere in your portfolio. Key rules:

• Short-term losses offset short-term gains first, then long-term gains
• Long-term losses offset long-term gains first, then short-term gains
• Net capital loss deduction: Up to $3,000/year can offset ordinary income. Excess carries forward indefinitely.
• Wash-sale rule (IRC §1091): If you buy the same or a "substantially identical" security within 30 days before or after the sale, the loss is disallowed. Applies to stocks, ETFs — does NOT currently apply to cryptocurrency.

Harvesting strategy: sell the loser, immediately buy a similar-but-not-identical replacement (e.g., swap Vanguard S&P 500 ETF for Fidelity S&P 500 ETF). You maintain market exposure, lock in the tax loss, and avoid the wash-sale rule.

Zero-Rate Harvesting: Realizing Gains Tax-Free

If your taxable income falls in the 0% long-term capital gains bracket ($94,050 MFJ in 2025), you can sell appreciated assets and pay zero federal capital gains tax. Immediately repurchase — your cost basis resets higher, reducing future gain.

This strategy is most useful for early retirees, gap years, or lower-income years. For business owners with variable income, planning a zero-rate harvest in a down-income year can reset basis on a large stock position at zero tax cost.

Qualified Small Business Stock (QSBS): IRC §1202

IRC §1202 allows shareholders of qualifying small business stock to exclude up to $10 million (or 10× their basis, whichever is greater) in capital gains from federal income tax — completely, not just deferred.

• Requirements: C-Corp (not S-Corp, LLC, or partnership), active business, gross assets under $50M at time of issuance, held by original investor for 5+ years
• Excluded industries: Services (law, consulting, finance, hospitality), farming, extraction
• Exclusion percentage: 100% for stock acquired after September 27, 2010
• State conformity: Most states do NOT follow federal QSBS exclusion — California taxes the full gain at state rates

QSBS is why Delaware C-Corp remains the standard structure for venture-backed startups. A founder who exits for $10M on stock with $100K basis: $0 federal capital gains tax.