Capital Gains Tax Deferral On Stocks
Do you own stock that has the potential to earn large capital gains? If so, when you sell, you might lose a significant portion of that to capital gains taxes.
Maybe you have founders’ stock from a small startup that sold big or shares from an employee stock option that have grown significantly. Maybe you bought shares of Apple or Amazon a long time ago, and you are ready to cash in. Even if you’ve held these stocks for over a year and qualify for the lower capital gain rates, the tax burden is still significant.
We are here to help you understand your options for lowering or deferring capital gains tax on stocks.
How Are Capital Gains Taxes Calculated?
Short-Term Capital Gains
Stock bought and sold within the same year are subject to short-term capital gains tax rates. Short-term capital gains are simply added to your taxable income for the year, and taxes are calculated at the appropriate tax bracket. That means that federal taxes on short-term capital gains range from 10%-37%.
In states with an income tax, you would owe additional taxes up to 13%. For high earners, there is also the potential for the Net Investment Income Tax (NIIT), which would be an additional 3.8%.
Long-Term Capital Gains
To incentivize long-term investments, the federal government charges lower taxes on assets held for longer than a year. Long-term capital gains tax rates range from 0%-20% on the federal level.
States can still add an additional tax, and even some states without income tax will levy a capital gains tax that can be as high as 13.3%.
Your tax rate is dependent on your tax bracket for the fiscal year in which you sell your stock.
Ways to Reduce or
Defer Capital Gains Tax on Stocks
Even if you wait at least a year to sell your highly appreciated stock assets, the taxes you owe on a $1 million profit could be as high as $541,000.
There are a handful of ways of reducing or deferring your capital gains taxes on stock.
Wait to Sell
The most obvious strategy is to hold your assets for at least a year before selling. As we described earlier, long-term capital gains are taxed at a significantly lower rate than those bought and sold in the same year.
Donate to Charity
If you donate stock directly to charity without selling it first, you don’t pay any capital gains taxes on that stock. Additionally, your donation can be deducted from your taxable income. So instead of selling your asset and then donating some of the proceeds to the charitable organization of your choice, just donate the stock directly and avoid the taxes.
Use a Deferred Sales Trust
While you may not be familiar with it, a Deferred Sales Trust is an effective strategy for delaying capital gains taxes on highly appreciated assets. It is completely legal when executed properly and has been tested in IRS audits multiple times.
Harvest Losses
Another frequently used strategy is to offset your gains by harvesting your losses. When you sell a stock at a loss, you can use that loss to offset other gains up to $3,000 in one year. Additional losses can roll over to offset gains in future years.
Die Without Selling Appreciated Stock
If you are hoping to leave a wealth legacy for your children and grandchildren, you can consider hanging onto your stock until you die. Capital gains on stock are calculated by subtracting the price of the stock when you bought it (the cost basis) from the price of the stock when you sell it.
If you gift the stock, the cost basis carries over to the new owner. However, when you die before selling, the cost basis is “stepped up” to the fair market price on the day of your death. That means that potential heirs won’t owe capital gains taxes on any appreciation in your lifetime.
What is a Deferred Sales Trust?
A Deferred Sales Trust (DST) is a contract between an investor and an independent third-party trust. The investor sells the appreciated stock to the trust and is given a promissory note outlining repayment of the proceeds over a period of time determined by the investor.
Essentially, the owner of the asset becomes a lender to the trust. This allows the owner to defer paying capital gains taxes until they receive proceeds from the trust. They can even choose to reinvest their proceeds and be paid only the interest from their investments, which would delay capital gains taxes on the principal proceeds indefinitely.
Benefits of Using a Deferred Sales Trust for Your Stocks
Why choose to use a Deferred Sales Trust? There are several benefits beyond traditional strategies for reducing capital gains taxes.
No Caps or Limits
There is no cap on the amount of money that can be deferred. With other methods, you can only offset losses up to $3,000, and there are limitations to the amount of charitable donations you can deduct. However, with a Deferred Sales Trust, you can defer all of your capital gains taxes, no matter how large your gains.
Flexibility
A Deferred Sales Trust gives you flexibility. A DST allows you to utilize optimal timing, delaying your payments and your taxes until it is most advantageous to you. A DST also gives you flexibility in your investment options. You can choose to reinvest your capital gains into real estate, cryptocurrency, bonds, or any other asset you choose.
Pass on Wealth While You are Living
You don’t have to die to start passing your wealth onto your heirs when you use a Deferred Sales Trust. You can structure your trust to transfer a portion of your principal to your heirs, securing your wealth legacy for future generations.
Why Choose Capital Gains Tax Solutions?
Professional
While a Deferred Sales Trust is not a complicated concept, you need a team of experts to execute it well. Legally, a DST requires a fully independent trustee and a third-party trust.
At Capital Gains Tax Solutions, we can offer you not only the services of an experienced and qualified Deferred Sales Trust trustee but also the advice and expertise of tax attorneys, CPAs, and financial advisors. We work hard to ensure that your trust, investments, and payment plan address your unique challenges and risk tolerance and set you up to achieve your personal financial goals.
Experienced
Our team at Capital Gains Tax Solutions has over 14 years of experience with Deferred Sales Trusts. We understand the investment industry in-depth and make it a priority to help you understand it, too.
We don’t want you to just be comfortable but confident in the choices you make for your highly-appreciated assets. We think the Deferred Sales Trust is a reliable, versatile strategy for transforming your wealth. However, we want you to find the solution that best fits your needs. We are dedicated to sharing our knowledge and experience to help you make the right decision.
Tested
Maybe you’ve never heard of a Deferred Sales Trust, and you feel wary about investing your wealth this way. We get that. You can be sure that the Deferred Sales Trust is not a gimmick or a flimsy tax loophole. This tax strategy has successfully withstood 14 IRS audits and 8 state audits with no changes.
This method is safe and legal, and it has been tested in nearly every financial market. We will also connect you with other clients in similar situations who have used the Deferred Sales Trust so that you can ask them questions and learn from their experiences.
Trustworthy
Our founder, Brett Swarts, is a Deferred Sales Trust trustee, an expert in the Deferred Sales Trust, an author, and a podcast host. But aside from that, he is a dedicated husband and loving father of five. He loves the Bible, basketball, and the San Francisco 49ers.
He started his career working three to four jobs at a time to make ends meet, get through school, and provide for his wife and newborn daughter. He has worked hard to get where he is, and he wants to help others use their wealth to transform their lives, provide for their families, and secure their futures.
How To Get Started
Getting started with Capital Gains Tax Solutions is as easy as filling out the form online or making a phone call. We can get started on the process of setting you up for the possibility of using a Deferred Sales Trust right away, but you are free to back out at any time. Until the deal closes, you are under no obligation to continue, and our services don’t cost you anything.
Step One: Let’s Talk
We will cover the 22-year history of the Deferred Sales Trust, including its 2,000+ successful cases and 14 IRS audits (closed with no changes). When you feel confident about the possibility of a Deferred Sales Trust, we will walk you through the next steps and the necessary timing to leave the door open to a DST. This first consultation is absolutely free with no obligations. You can feel comfortable exploring your options and conducting due diligence with no risk.
Step Two: Sign a Conditional Agreement
If you decide that you want to continue to pursue a Deferred Sales Trust, the next step is to sign a conditional engagement agreement. This allows our tax attorneys to build a Deferred Sales Trust personalized to meet the requirements of selling your appreciated stock.
While you have signed an engagement contract agreeing to work with our company, it does not require you to continue with a Deferred Sales Trust. Until the sale closes, you always have the option to back out with no penalty.
Step Three: Finalize Decisions and Close the Sale
With the help of closing attorneys, we will ensure that everything is structured properly and then execute what is called a “simultaneous close.” You will sell your stock to the trust, and the trustee will simultaneously sell the stock to a buyer and take ownership of the proceeds.
You will receive a promissory note from the trust outlining the payment structure you decided on. You will be able to successfully defer capital gains taxes until you receive payment of the proceeds (and you only owe taxes on the portion of the profit you receive with each installment). If you structure your trust so that you are only receiving interest from your investments, you can defer your capital gains taxes indefinitely.
Don’t Wait
If you have been wondering how to defer capital gains taxes on stocks, even if you don’t intend to sell your shares right away, reach out for a free consultation. It is never too early to explore your options and make a plan for your wealth.
Timing is important when it comes to your investments, so if you are prepared now with the option of using a Deferred Sales Trust, you will be ready to sell when the time is right.
