11 Aug How to Reduce Taxes on Highly Appreciated Investments
How Can You Reduce Taxes on Highly Appreciated Investments?
Watching an investment grow substantially over time can be rewarding. But eventually, investors with highly appreciated assets may face another question:
What happens when I want—or need—to sell?
Stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investments held in taxable accounts may accumulate significant unrealized gains over the years. Selling those investments can create a capital gains tax liability, which means the decision to sell isn’t always as simple as deciding whether you still want to own the investment.
Taxes shouldn’t necessarily determine every investment decision. However, understanding the potential tax consequences before selling a highly appreciated asset can help you make a more informed decision.
Depending on your circumstances, strategies involving the timing of a sale, capital losses, charitable giving, and estate planning may help manage the tax impact of appreciated investments.
What Is a Highly Appreciated Asset?
A highly appreciated asset is generally an investment or other property that is now worth substantially more than its cost basis.
For example, suppose you purchased an investment for $100,000 and it eventually grew to $300,000. The difference between the investment’s value and its adjusted cost basis represents an unrealized gain while you continue to own it.
If you sell the investment, some or all of that gain may become taxable.
This can become particularly important for investors who have accumulated large positions in a single company or who have owned investments for many years.
A concentrated position can create two planning considerations at the same time: reducing investment risk through diversification while also managing the potential tax consequences of selling appreciated shares.
1. Consider the Timing of the Sale
One of the first considerations when selling an appreciated investment is how long you’ve owned it.
Under current federal tax rules, investments held for more than one year generally qualify for long-term capital gains treatment. Long-term capital gains are generally subject to federal tax rates of 0%, 15%, or 20%, depending on taxable income.
By comparison, gains on investments held for one year or less are generally considered short-term capital gains and are taxed at ordinary income tax rates. The highest federal ordinary income tax rate can reach 37%.
For that reason, the difference between selling an investment shortly before or shortly after reaching the one-year holding period can sometimes have significant tax consequences.
Timing may matter for another reason as well.
If you anticipate unusually large deductions or lower taxable income in a particular year, it may be worth discussing whether recognizing some capital gains during that year fits into your broader tax strategy.
The decision should still take investment risk into account. Holding an investment solely for tax reasons may expose you to market risk that outweighs the potential tax benefit.
Don’t Forget the Net Investment Income Tax
Some higher-income investors may face an additional tax when realizing investment gains.
The 3.8% Net Investment Income Tax (NIIT) can apply to certain investment income—including capital gains—when modified adjusted gross income exceeds applicable thresholds.
The Broadridge material notes thresholds of $200,000 for single filers and $250,000 for married couples filing jointly.
This means the tax consequences of selling a large appreciated position may extend beyond the regular capital gains tax rate.
Before completing a significant sale, it can be helpful to estimate how the transaction could affect your overall taxable income rather than looking at the investment gain in isolation.
2. Look for Opportunities to Offset Gains With Capital Losses
Investors don’t always have to look only at the asset they’re considering selling.
The rest of the portfolio matters, too.
If some investments have declined in value, realizing those losses may provide an opportunity to offset realized capital gains. This strategy is commonly referred to as tax-loss harvesting.
Capital gains and losses are subject to specific netting rules. If capital losses exceed capital gains, up to $3,000 of excess losses may generally be used to offset ordinary income each year ($1,500 for married individuals filing separately). Remaining unused losses may generally be carried forward to future tax years.
For someone preparing to sell a highly appreciated investment, reviewing the entire taxable portfolio for unrealized losses may uncover opportunities to help manage the resulting tax liability.
Tax-Loss Harvesting Shouldn’t Be Done in Isolation
There is an important distinction between finding a tax opportunity and making a good investment decision.
Selling an investment solely to create a tax loss may not make sense if doing so conflicts with your long-term investment strategy.
Tax-loss harvesting should therefore be considered alongside questions such as:
- Does the investment still fit my portfolio?
- Has my risk tolerance changed?
- Am I too heavily concentrated in one investment or sector?
- Would selling help improve my overall diversification?
- How would the transaction affect my tax situation?
Coordinating tax planning with investment management can help ensure that a decision designed to reduce this year’s tax bill doesn’t inadvertently undermine a longer-term financial objective.
3. Think Carefully Before Gifting Appreciated Investments to Family
Another strategy investors sometimes consider is giving appreciated investments to children, grandchildren, or other family members.
But gifting an appreciated asset doesn’t necessarily make the embedded capital gain disappear.
Generally, someone who receives property as a lifetime gift receives the donor’s cost basis, subject to applicable tax rules. This is commonly called carryover basis.
For example, if you purchased an investment for $50,000 that is now worth $200,000 and give it to a family member, that individual generally doesn’t receive a new $200,000 cost basis simply because ownership changed.
If the recipient later sells the investment, the original basis may factor into calculating the taxable gain.
That makes the recipient’s tax situation an important consideration when evaluating a lifetime gift of appreciated property.
Gifting May Still Make Sense in Certain Situations
Carryover basis doesn’t mean appreciated investments should never be gifted.
If the recipient is in a lower tax bracket and the investment was going to be sold anyway, gifting the asset before the sale may produce a different overall tax result than selling it yourself.
However, income taxes are only one consideration. Federal gift tax rules also need to be evaluated.
For 2026, the Broadridge material identifies the annual federal gift tax exclusion as $19,000 per recipient. Gifts exceeding the annual exclusion don’t necessarily result in an immediate gift tax bill, but they may require additional reporting and may use a portion of the donor’s available lifetime exclusion.
Because gifting appreciated property can involve both income and estate and gift tax considerations, it’s an area where coordination among your financial advisor, CPA, and estate planning attorney can be particularly important.
4. Gifting Appreciated Assets During Your Lifetime vs. Passing Them at Death
When deciding what to do with a highly appreciated investment, it’s important to consider not only who will eventually receive the asset, but also when they will receive it.
As we discussed above, property given during your lifetime generally carries your cost basis to the recipient. That means the unrealized gain may eventually become taxable when the recipient sells the investment.
Assets transferred at death are generally treated differently.
Under current federal tax rules, inherited property generally receives an adjustment in cost basis to its fair market value at the owner’s date of death. This is commonly referred to as a step-up in basis when the asset has appreciated.
Consider an investment originally purchased for $50,000 that is worth $200,000 when the owner dies. If the investment qualifies for a basis adjustment to its $200,000 fair market value, the beneficiary’s basis would generally become $200,000.
If the beneficiary subsequently sold the investment for approximately that amount, there could be little or no capital gain attributable to the appreciation that occurred during the original owner’s lifetime.
This difference between carryover basis for lifetime gifts and the general basis adjustment for inherited assets can be an important consideration when developing a broader estate and tax strategy.
Don’t Let Taxes Be the Only Consideration
That doesn’t mean every highly appreciated investment should automatically be held until death.
Tax planning is only one part of the decision.
An investment may represent too much of your overall portfolio. You may need the proceeds for retirement income. Your investment objectives may have changed. Or reducing the risk associated with a concentrated position may be more important than preserving a potential future tax benefit.
The goal isn’t necessarily to avoid realizing capital gains at all costs.
Instead, the goal is to understand the trade-offs and make decisions that support your broader financial plan.
5. Consider Charitable Giving With Appreciated Assets
If charitable giving is already part of your financial plan, highly appreciated investments may provide another planning opportunity.
Rather than selling an appreciated investment, paying the resulting capital gains tax, and then donating cash, an investor may consider donating the appreciated asset directly to a qualified public charity.
According to the Broadridge educational material, a donation of qualifying long-term capital gain property to a qualified public charity may generally allow a charitable deduction based on the property’s fair market value, subject to applicable adjusted gross income limitations and other tax rules.
For the type of appreciated property discussed in the source material, the deduction may generally be limited to 30% of adjusted gross income. Amounts that cannot be deducted in the current year may generally be carried forward for up to five succeeding years.
Potential benefits can include:
- Avoiding realization of the embedded capital gain on the donated asset.
- Potentially receiving a charitable income tax deduction, subject to applicable rules and limitations.
- Removing future investment income and appreciation associated with the donated asset from your portfolio.
- Supporting organizations or causes that are important to you.
Charitable giving strategies can become complex, and the tax treatment depends on the type of asset, the organization receiving it, how long the asset has been held, and the donor’s individual tax circumstances.
What About a Donor-Advised Fund?
For investors with appreciated assets and ongoing charitable goals, a Donor-Advised Fund (DAF) may also be worth discussing with their financial and tax professionals.
A donor-advised fund can allow an individual to make an irrevocable charitable contribution and then recommend grants to eligible charities over time.
When appropriate, contributing appreciated investments rather than cash may allow an investor to incorporate charitable giving into a broader tax and investment strategy.
A donor-advised fund isn’t appropriate for every situation, and contributions are generally irrevocable. The potential tax benefits also depend on individual circumstances and applicable tax rules.
Planning for a Concentrated Investment Position
These tax strategies can become particularly important when a significant portion of your wealth is tied to one investment.
A concentrated position may develop for many reasons. You may have owned shares of a successful company for decades, accumulated employer stock throughout your career, inherited investments, or simply watched one holding appreciate much faster than the rest of your portfolio.
The result can create a difficult decision:
Do you continue holding the investment and accept the concentration risk, or sell some of it and potentially generate a significant tax liability?
There isn’t one answer that works for everyone.
A thoughtful strategy may involve evaluating several approaches over time rather than making one large transaction. Depending on the circumstances, that could include gradually reducing the position, coordinating gains with available capital losses, incorporating charitable giving, or considering the asset as part of a longer-term estate plan.
Highly Appreciated Asset Planning Checklist
If you own investments with substantial unrealized gains, consider discussing these questions with your financial and tax professionals:
- ☐ What is my current cost basis in the investment?
- ☐ How much unrealized capital gain do I have?
- ☐ Have I owned the investment for more than one year?
- ☐ What would my estimated federal and state tax liability be if I sold today?
- ☐ Could the sale expose me to the 3.8% Net Investment Income Tax?
- ☐ Do I have capital losses elsewhere in my portfolio that may offset some gains?
- ☐ Does this investment represent too much of my overall portfolio?
- ☐ Do I expect my taxable income to change significantly in future years?
- ☐ Am I considering gifting the investment to family members?
- ☐ How would gifting the asset affect its cost basis?
- ☐ Is charitable giving already part of my financial plan?
- ☐ Should this asset be considered as part of my estate planning strategy?
Answering these questions can help shift the conversation from simply asking, “How do I avoid paying capital gains tax?” to the more useful question: “What strategy makes sense for my overall financial situation?”
Frequently Asked Questions
How can I reduce capital gains taxes on appreciated investments?
Depending on your circumstances, strategies may include holding an investment long enough to qualify for long-term capital gains treatment, coordinating realized gains with capital losses, spreading sales across different tax years, donating appreciated investments to charity, or incorporating appreciated assets into estate planning. Each strategy has different tax and investment consequences.
Should I sell a highly appreciated stock?
Taxes are only one factor to consider. Holding a highly appreciated investment may defer capital gains taxes, but an overly concentrated position can also expose your portfolio to additional investment risk. Your decision should consider diversification, financial goals, cash-flow needs, tax consequences, and your tolerance for risk.
What happens to capital gains when appreciated investments are inherited?
Under current federal tax rules, property transferred at death generally receives a cost-basis adjustment to its fair market value as of the owner’s date of death. For appreciated assets, this is commonly known as a step-up in basis. Specific estate and tax circumstances can affect the treatment, so professional guidance is important.
What happens to the cost basis when I gift stock to my children?
Generally, the recipient of a lifetime gift receives the donor’s basis in the property, subject to applicable tax rules. This is known as carryover basis. As a result, gifting an appreciated investment does not necessarily eliminate the unrealized capital gain.
Can I donate appreciated stock instead of cash?
Qualified charities may accept appreciated securities. Depending on the asset and your individual circumstances, donating qualifying long-term appreciated property directly may provide a charitable deduction while avoiding realization of the embedded capital gain. Deduction limits and other requirements apply.
Can I use investment losses to offset capital gains?
Yes. Capital losses can generally offset capital gains according to federal tax netting rules. If eligible losses exceed gains, up to $3,000 of net capital losses may generally offset ordinary income annually ($1,500 if married filing separately), with remaining losses generally carried forward to future years.
The Bottom Line
A highly appreciated investment can represent years—or even decades—of successful investing. But the larger the unrealized gain becomes, the more important it can be to coordinate investment decisions with tax, charitable, and estate planning.
There isn’t a single strategy for managing appreciated assets.
For one investor, gradually diversifying may be appropriate. Another may have capital losses available to offset gains. Someone with charitable goals may consider donating appreciated assets. And another family may need to evaluate whether an investment is better incorporated into a longer-term estate strategy.
The important part is looking at the entire financial picture before acting.
Do You Have Highly Appreciated Investments?
If a significant portion of your wealth is tied to investments with substantial unrealized gains, developing a coordinated strategy may help you balance diversification, taxes, retirement income, charitable goals, and estate planning.
At Nova Wealth Management, we help individuals and families evaluate investment and tax planning decisions within the context of their broader financial goals. When appropriate, we can also coordinate with your CPA and estate planning attorney as part of that process.
Schedule a Meeting to discuss your financial plan with one of our advisors.
Toll-Free: (888) 677-9910
Prepared using educational information from Broadridge Advisor Solutions. © 2026 Broadridge Financial Services, Inc.
Disclosure: Nova Wealth Management, Inc. is a Registered Investment Advisor. This material is provided for general educational and informational purposes only and is not intended to provide personalized investment, tax, or legal advice. Tax laws and regulations are complex and subject to change. The tax treatment of any strategy depends on individual circumstances. Consult with qualified tax and legal professionals regarding your specific situation. Investing involves risk, including the possible loss of principal, and diversification does not guarantee a profit or protect against loss.
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