How to Reduce Capital Gains Tax Without Capital Losses

Here’s How to Reduce Capital Gains Tax Without Capital Losses (Our Top 10 List)

-Written by Kent Fitzpatrick, AIFA®, GFS®, MSCTA©, Managing Director, Senior Consultant

Most investors assume that offsetting a capital gain requires a capital loss, and technically, they’re right. Capital gains can only be directly offset by capital losses. If you don’t have losses available, it can feel like your options are gone.

But that framing is too narrow, and it costs people real money.

Long-term capital gains aren’t taxed at a flat rate. The rate you pay depends on your total taxable income, not the size of the gain itself. The federal rates are 0%, 15%, or 20%, and where you land matters enormously.

One more layer: if your taxable income approaches $200,000 (single) or $250,000 (married filing jointly), an additional 3.8% Net Investment Income Tax (NIIT) applies on top of those rates, bringing the effective top federal rate to 23.8% before state taxes.

That structure matters. Every dollar you reduce your taxable income, whether through deductions, business expenses, retirement contributions, or strategic planning, can move your gain into a lower bracket or eliminate NIIT exposure entirely. You’re not erasing the gain. You’re changing what you owe on it, often dramatically.

The strategies below work across multiple types of taxable events, not just capital gains. Some defer the tax. Some reduce the tax. Some eliminate it entirely. Some offset other income. Many strategies do more than one. The right combination, planned before the sale closes, can change the outcome significantly.

How to Reduce Capital Gains Tax

1) 1031 Exchanges & Delaware Statutory Trusts (DSTs)

Applies to: Selling Investment Real Estate

The §1031 Exchange is probably the most well-known capital gains tax deferral tool in real estate, and for good reason. It has been part of the tax code since 1921. Sell an investment property, reinvest the proceeds into another qualifying “like-kind” investment property, and you can defer 100% of the capital gains tax, depreciation recapture, and NIIT.

Since the Tax Cuts and Jobs Act, §1031 only applies to real property held for business or investment use. The catch is the process and timeline. You must engage a disinterested party, called a Qualified Intermediary (QI), to take constructive receipt at the closing. Once closed, you have 45 days to identify eligible replacement properties and 180 days to close. Miss any of those, and the whole exchange can fall apart.

But if you don’t want to actively manage your tenants or property and also do not want to trigger all the taxes, a Delaware Statutory Trust (DST) can serve as a passive replacement property option for accredited investors. DSTs give you fractional ownership in professionally managed, institutional-quality real estate. You get the tax deferral without the landlord headaches, and you can split the reinvestment across several DSTs to diversify by property type and location.

You can also replace debt with non-recourse debt, freeing up your balance sheet. DSTs can also be combined with real property to complete your 1031. Hold those replacement assets until death, and the step-up in basis can turn the deferral into something close to permanent.

How to Reduce Capital Gains Tax

2) The 721 Exchange (UpREIT)

Applies to: Selling Investment Real Estate

A §721 exchange is typically structured through a DST-to-UPREIT transaction. The investor first completes a §1031 exchange into a Delaware Statutory Trust (DST), since OP Units and REIT shares do not qualify as replacement property under §1031.

The DST property is then contributed into the REIT’s Operating Partnership in exchange for OP Units pursuant to IRC §721. This allows the investor to transition from direct real estate ownership into a passive interest with potential diversification and institutional management benefits, all while maintaining tax deferral.

The deferral generally continues as long as the OP Units are held, but with a potential liquidity path.

How to Reduce Capital Gains Tax

3) Qualified Opportunity Zone Investments

Applies to: Capital Gains from Any Asset Class

The Opportunity Zone (OZone) program came out of the 2017 Tax Cuts and Jobs Act and does something a §1031 can’t: it works across asset classes. Stocks, crypto, real estate, a business sale, and even qualified §1231 gains: the IRS treats them all as eligible. Reinvest the gain into a Qualified Opportunity Fund (QOF) within 180 days of triggering the gain, and the tax on that gain gets deferred. If you own the asset in a pass-through entity, such as a partnership or S corporation, that 180 days can be extended.

The real payoff comes with patience. Hold the QOF investment for at least 10 years, and any appreciation on the new investment can be excluded from tax entirely. Permanent tax-free growth on the appreciation is rare in the tax code, which is why this one gets a lot of attention from investors with long time horizons and capital they don’t need to touch.

One timing note for current QOF investors: deferred gains from pre-OBBBA investments are recognized December 31, 2026, even if you continue to hold the QOF. The One Big Beautiful Bill Act (OBBBA), signed in 2025, expanded and enhanced the program going forward, with key provisions taking effect beginning in 2027.

How to Reduce Capital Gains Tax

4) Tax-Loss Harvesting and Direct Indexing

Applies to: Realized Capital Gains in Taxable Investment Accounts

If you have taxable investment accounts, tax-loss harvesting is one of the easiest ways to offset a capital gain. Sell positions that are down to realize losses, then apply those losses against your gains dollar for dollar. If your losses exceed your gains, you can deduct up to $3,000 against ordinary income each year, and any leftover losses carry forward indefinitely.

Two things to watch. The wash sale rule will disallow the loss if you buy back the same or a substantially identical security within 30 days before or after the sale. And for investors who’d rather not chase this manually, a Direct Indexing managed account handles the harvesting systematically across a broader portfolio, building what’s sometimes called “tax alpha” over time.

How to Reduce Capital Gains Tax

5) Charitable Strategies: Charitable Remainder Trusts (CRT) and Donor-Advised Funds (DAF)

Applies to: Highly Appreciated Assets and Donors with Charitable Intent

A Charitable Remainder Trust (CRT) is worth considering when you want to create a deduction, generate income, and have charitable intent. You move the appreciated asset, whether publicly traded securities, real estate, or most closely held business interests (S-Corp stock is the exception), into an irrevocable charitable trust. The trust sells the asset and reinvests the full proceeds with no immediate capital gains hit.

From there, you or your beneficiaries collect an income stream for a set term or for life, and you get an immediate partial income tax deduction for the present value of what will eventually go to charity. The math works best when the gain is large enough that paying taxes upfront would seriously shrink the asset base generating your income.

What about your family? Combine a CRT with an Irrevocable Life Insurance Trust (ILIT) to potentially provide tax-free wealth replacement.

If you’re already planning to give, give smart. Donating appreciated securities or real estate directly to a Donor-Advised Fund (DAF) or qualified charity is almost always better than selling first and donating the cash. You skip the capital gains tax on the appreciation and still get a charitable deduction for the full fair market value (subject to AGI limits), as long as you’ve held the asset more than a year. A DAF is essentially a charitable giving account. You contribute once, get the deduction that year, and then recommend grants to charities at your own pace. It’s a useful tool for concentrating a large deduction into a high-income year without committing immediately to where the money ultimately goes.

How to Reduce Capital Gains Tax

6) Oil and Gas Investments

Applies to: High Ordinary Income Years, Including Years with a Large Capital Gain

For accredited investors, oil and gas offers some of the most aggressive deductions in the entire tax code. Invest in a domestic drilling project, and intangible drilling costs (IDCs), which usually make up the bulk of the investment, can be fully deductible in year one. Tangible drilling costs (TDCs) may qualify for bonus depreciation. Once the well is producing, a 15% depletion allowance kicks in on qualifying income.

Here’s the nuance worth understanding. IDC deductions reduce your taxable income directly, before AGI is calculated, and they primarily offset ordinary income like W-2 wages, business profits, and self-employment earnings. Under §469(c)(3), a working interest in oil and gas is one of the only explicit statutory exemptions from the passive activity rules in the entire tax code, meaning these deductions are treated as active, not passive, regardless of your level of participation.

That distinction matters enormously. It means these losses sidestep the passive activity rules that kill most other investment write-offs.

IDCs don’t offset a capital gain directly, but the AGI reduction can keep your long-term gains in lower brackets and potentially below the NIIT threshold. If you’re facing a large capital gain in a year where your ordinary income is also high, oil and gas can hit both fronts at once.

How to Reduce Capital Gains Tax

7) Captive Insurance (Business Risk Management)

Applies to: Business Owners with Genuine Insurance Risks

For business owners, a captive insurance company can serve as both a risk management tool and a legitimate tax strategy, when structured properly around real business exposures.

Here’s how it works… Your operating business pays insurance premiums to a related captive insurance entity, covering risks that are either uninsured or underinsured in the commercial market. Those premiums are deductible as ordinary and necessary business expenses under §162, the same code section that covers any other legitimate business cost. The captive accumulates reserves to pay claims, and those reserves can be invested.

The §831(b) election applies to smaller captives with annual premiums under $2.9 million (2026). Under this election, the captive is taxed only on its investment income, not on the premiums it receives. That creates a meaningful tax efficiency for the business owner, provided the captive is insuring genuine risks with premiums backed by real risk analysis.

The connection to a capital gain event: business owners planning a sale often have elevated ordinary income in the years leading up to it. A properly structured captive can reduce that ordinary income through §162 deductions, which in turn lowers taxable income and can move capital gains into a lower bracket. It works the same way oil and gas IDC deductions do, not by offsetting the gain directly but by lowering the income base it sits on top of.

A word of caution: the IRS has scrutinized captive arrangements aggressively, particularly those that insure implausible risks or are designed primarily for tax benefits rather than genuine risk transfer. A well-structured captive built around real business exposures is defensible. One built around manufactured risks is not. This strategy requires experienced legal and tax counsel to implement correctly.

How to Reduce Capital Gains Tax

8) Installment Sales and Strategic Timing

Applies to: Sale of Non-Publicly-Traded Property

The Clean Electricity Investment Credit under §48E is one of the most powerful dollar-for-dollar tax reduction tools available to investors and business owners willing to invest in qualified energy infrastructure. Unlike a deduction, which reduces taxable income, a tax credit reduces your actual tax liability, dollar for dollar. A $1 million credit offsets $1 million of federal tax owed.

§48E replaced the legacy §48 Investment Tax Credit in 2025 and is technology-neutral. Any facility generating electricity with zero greenhouse gas emissions can qualify. Eligible projects include solar (sunsetting), wind (sunsetting), battery energy storage systems (BESS), microgrids, geothermal, hydropower, nuclear, and other zero-emission technologies.

The base credit is 6%, rising to 30% with prevailing wage and apprenticeship compliance, and further enhanced through available bonus credits. It is common for qualifying alternative energy projects to reach 40 to 50% of total project cost, and in some cases higher.

The credit can be carried back up to 3 years or forward up to 22 years, providing significant flexibility to apply it against prior or future tax liabilities. Alternatively, under §6418, the credit can be transferred to another taxpayer tax-free, a meaningful option for investors who want to monetize the credit without waiting to generate sufficient tax liability of their own.

One critical planning consideration: because §48E is an investment credit, the passive activity rules apply. To use the credit against active tax liability, the investor must meet material participation requirements. Without meeting those standards, the credit is treated as passive and can only offset passive income tax, limiting its utility for most high-income investors. Proper structuring of the ownership and management arrangement is essential.

How to Reduce Capital Gains Tax

9) Clean Electricity Investment Credit (§48E)

Applies to: Investors and Business Owners with Active Tax Liability

The Clean Electricity Investment Credit under §48E is one of the most powerful dollar-for-dollar tax reduction tools available to investors and business owners willing to invest in qualified energy infrastructure. Unlike a deduction, which reduces taxable income, a tax credit reduces your actual tax liability, dollar for dollar. A $1 million credit offsets $1 million of federal tax owed.

§48E replaced the legacy §48 Investment Tax Credit in 2025 and is technology-neutral. Any facility generating electricity with zero greenhouse gas emissions can qualify. Eligible projects include solar (sunsetting), wind (sunsetting), battery energy storage systems (BESS), microgrids, geothermal, hydropower, nuclear, and other zero-emission technologies.

The base credit is 6%, rising to 30% with prevailing wage and apprenticeship compliance, and further enhanced through available bonus credits. It is common for qualifying alternative energy projects to reach 40 to 50% of total project cost, and in some cases higher.

The credit can be carried back up to 3 years or forward up to 22 years, providing significant flexibility to apply it against prior or future tax liabilities. Alternatively, under §6418, the credit can be transferred to another taxpayer tax-free, a meaningful option for investors who want to monetize the credit without waiting to generate sufficient tax liability of their own.

One critical planning consideration: because §48E is an investment credit, the passive activity rules apply. To use the credit against active tax liability, the investor must meet material participation requirements. Without meeting those standards, the credit is treated as passive and can only offset passive income tax, limiting its utility for most high-income investors. Proper structuring of the ownership and management arrangement is essential.

How to Reduce Capital Gains Tax

10) QSBS Stacking (§1202)

Applies to: Sale of Qualified C-Corporation Stock

For founders, entrepreneurs, and closely held business owners, QSBS stacking under §1202 remains one of the most powerful capital gains elimination strategies available, and it became even more compelling under the One Big Beautiful Bill Act (OBBBA) in 2026.

For QSBS issued after July 4, 2025, eligible taxpayers may exclude the greater of $15 million or 10 times their adjusted basis. The OBBBA also replaced the binary five-year holding period with a tiered structure: 50% exclusion at three years, 75% at four years, and 100% at five years. Stock issued on or before July 4, 2025 retains the prior $10 million cap and the five-year all-or-nothing rule.

QSBS stacking takes this further. By gifting shares to multiple non-grantor trusts or family members before a liquidity event, each separate taxpayer or trust can utilize its own independent exclusion. Critically, each recipient inherits the donor’s holding period, not just the basis. Done early, when valuations are low, this can shelter tens of millions of dollars in federal capital gains tax entirely, a result no other strategy on this list can match at scale.

The IRS scrutinizes these structures closely, particularly where trusts lack economic substance or are created too close to a transaction. Proper timing, trust drafting, valuation support, and coordination between legal, tax, and estate planning professionals are essential.

A Note on Stepped-Up Basis

While not a planning strategy you execute during your lifetime, the §1014 stepped-up basis is worth understanding as a planning context. The 1031 Exchange, 721 Exchange, DST, and CRT all operate on the expectation that tax deferrals can become permanent at death when the heir’s basis resets to fair market value. This is why long-term deferral strategies and estate planning belong in the same conversation.

The Bottom Line

A large capital gain is not a tax sentence. It’s a planning opportunity, but only if you act before the sale closes. No single strategy fits everyone, and most of these stack well together. Once a sale closes, most of these options are either gone or significantly limited. It’s also worth understanding how the Alternative Minimum Tax (AMT) may interact with certain strategies before moving forward.

The strategies covered here represent only a fraction of what is available under the current tax code. Which ones are right for you depends on your income profile, asset type, timeline, family situation, and long-term goals. Effective implementation requires a licensed, experienced professional who can coordinate across your full advisory team.

If you’re facing a large capital gain this year or next, the time to plan is now. Book a Discovery Call with our team to see how Asset Strategy can help you keep more of what you’ve built.