Capital gains taxes affect investment decisions, charitable giving, and estate planning. EP Wealth explains how high-net-worth investors can approach these areas in a coordinated way. 

Strategies for Managing Capital Gains Taxes on Large Portfolios

For investors with sizable portfolios, capital gains taxes can represent one of the largest recurring drags on after-tax wealth. The federal long-term capital gains rate of 15% or 20%, combined with the 3.8% Net Investment Income Tax and state income taxes, can mean losing a quarter or more of every realized gain.

That tax exposure can surface when rebalancing a portfolio, but it also applies when liquidating a concentrated stock position or drawing down investments to fund retirement. The tax consequences of each decision depend on factors such as income sources, account structure, holding periods, and the broader financial plan.

Strategies that may help reduce capital gains taxes on large portfolios include:

• Harvesting investment losses—including through direct indexing—to offset realized gains
• Placing investments in the right account types based on their tax characteristics
• Donating appreciated securities to charity or to a donor-advised fund
• Diversifying concentrated stock positions through exchange funds or systematic selling
• Timing gain recognition across multiple tax years to manage bracket exposure
• Holding appreciated assets for heirs to take advantage of the step-up in basis

The right combination depends on your specific circumstances. A financial advisor can help evaluate which approaches fit within your broader financial picture.

How Capital Gains Taxes May Apply to Large Portfolios

Before looking at specific strategies, it helps to understand what drives the tax bill. For high-income investors, three layers of taxation can apply to realized investment gains.

Long-Term vs. Short-Term Rates

Investments held for more than one year qualify for long-term capital gains rates: 0%, 15%, or 20%, depending on taxable income. Investments held for one year or less are taxed at ordinary income rates, which currently range up to 37%.

For many high-net-worth investors, the applicable long-term rate is 15% or 20%. The rate is determined by total taxable income—including the gain itself—so a large gain can push portions of income from the 15% bracket into the 20% bracket within the same tax year.

The 3.8% Net Investment Income Tax

The Net Investment Income Tax (NIIT) is a separate 3.8% surtax that can apply when modified adjusted gross income (MAGI) exceeds $200,000 for single filers or $250,000 for joint filers. It generally covers capital gains, dividends, interest, rental income, some non-qualified annuity payments, and passive business income.

These thresholds have not been adjusted for inflation since 2013, which means they affect a broader group of taxpayers each year. For an investor in the top bracket, the combined federal rate on long-term capital gains reaches 23.8% (20% + 3.8%).

State Taxes Add Another Layer

State income taxes on capital gains vary widely. Some states have no income tax; others tax capital gains at rates that can exceed 10%. When combined with federal rates and the NIIT, the all-in tax on a long-term gain can approach or exceed 35% in high-tax states.

Federal Capital Gains Tax Rates for High-Income Investors 

Sources: https://www.irs.gov/filing/federal-income-tax-rates-and-brackets, https://www.irs.gov/taxtopics/tc409, https://www.irs.gov/individuals/net-investment-income-tax

Strategies for Managing Capital Gains Taxes on Large Portfolios

The strategies below address different aspects of capital gains exposure. Some aim to help reduce the amount of gain that's realized. Others shift the timing of when gains are recognized or change how they're taxed. In many cases, the greatest benefit comes from combining several of these approaches within a coordinated plan.

Tax-Loss Harvesting

Tax-loss harvesting offsets realized gains by selling positions in taxable accounts that have declined below their purchase price. The resulting losses can offset gains dollar for dollar, with up to $3,000 of excess losses applied against ordinary income each year. Any remaining losses carry forward.

The typical approach is to replace the sold position with a similar—but not "substantially identical"—investment to maintain market exposure. The IRS wash-sale rule disallows the loss if the same or a substantially identical security is purchased within 30 days before or after the sale. Harvesting throughout the year, rather than only at year-end, tends to capture more opportunities as market volatility creates temporary dislocations.

One important nuance: tax-loss harvesting often creates a deferral rather than a permanent elimination of tax. If the replacement investment later appreciates, the investor may eventually realize taxable gains, though the deferral can still provide meaningful value over long time horizons.

Direct Indexing

Direct indexing is a portfolio construction approach in which the investor owns the individual securities that make up an index rather than holding an index fund or ETF. Because each stock is held individually, losses can be harvested at the security level—even in a rising market, some component stocks will be down at various points.

This approach can be especially relevant for investors with large taxable accounts who need to offset gains from other sources. It introduces additional complexity and generally works best at higher account sizes. A financial advisor can help evaluate whether it fits within your portfolio structure.

Asset Location

Asset location refers to which investments you hold in which account types—taxable, tax-deferred, or tax-exempt.

• Taxable brokerage accounts are often better suited for tax-efficient holdings like broad index funds, ETFs, and municipal bonds—investments that generate fewer taxable distributions and benefit from long-term capital gains rates.
• Tax-deferred accounts (Traditional IRA, 401(k)) may be more appropriate for less tax-efficient holdings like actively managed funds, REITs, and taxable bonds, where income would otherwise be taxed annually at ordinary income rates.
• Tax-exempt accounts (Roth IRA, Roth 401(k)) are potentially beneficial for holdings with higher expected growth, since qualified withdrawals—including all accumulated gains—are tax-free.

Asset location also interacts with other planning areas. Appreciated investments held in a taxable account may receive a step-up in basis at death, while traditional IRA assets do not. Charitable strategies like donating appreciated securities can only be applied to holdings in taxable accounts. And withdrawal sequencing in retirement depends in part on which account types hold which assets. These interactions are one reason asset location is best evaluated in context rather than as a standalone decision.

Charitable Giving Strategies

For investors with charitable goals, directing appreciated assets to charity can serve both philanthropic and tax planning objectives.

• Donating appreciated securities. Contributing long-term appreciated securities directly to a qualified charity—rather than selling them and donating cash—can potentially avoid triggering the capital gain entirely. The donor may also be eligible for an income tax deduction at fair market value, subject to AGI-based limits (generally up to 30% of AGI for appreciated property).
• Donor-advised funds. A DAF allows the investor to contribute appreciated securities to a charitable account, claim the deduction in the contribution year, and then direct grants to specific charities over time. DAFs can be particularly useful in years with unusually high income—such as the year of a business sale or a large Roth conversion—when concentrating charitable deductions may offer greater tax planning benefit.
• Qualified charitable distributions. For investors age 70½ and older, QCDs allow IRA funds to be sent directly to a qualified charity. The distribution counts toward required minimum distributions but does not add to taxable income, which may also help manage Medicare premium surcharges (IRMAA).

Managing Concentrated Stock Positions

Investors with a significant share of their wealth in a single stock face a common tension: selling creates a large tax event, but continuing to hold concentrates risk. Several approaches may help address both sides.

• Systematic selling over time. Spreading sales across multiple tax years can keep realized gains within lower brackets and avoid bunching income in a single year. The trade-off is continued exposure to the concentrated position during what may be a multiyear transition.
• Exchange funds. These private investment vehicles allow accredited investors to contribute appreciated shares into a pooled, diversified fund without triggering a taxable event at contribution. Investors generally need to remain in the fund for at least seven years, and trade-offs include illiquidity during that period, higher fees, and K-1 tax reporting.
• Charitable and gifting approaches. Donating a portion of a concentrated position to a DAF or directly to charity can reduce the taxable share of the holding. Gifting shares to family members in lower tax brackets may reduce the overall family tax burden on the eventual sale, though the "kiddie tax" rules may apply to recipients under 19 (or under 24 if full-time students).

Timing and Income Management

Several timing-related strategies can affect the tax outcome in a given year.

• Holding period awareness. The rate difference between short-term and long-term treatment can be 15 to 20 percentage points at higher income levels. Selling an appreciated asset before the one-year mark can meaningfully increase the tax cost.
• Spreading gains across tax years. Recognizing gains in smaller increments over multiple years—rather than in a single large transaction—may keep more income in lower brackets.
• Coordinating with other income. A year with a large bonus or business distribution may be a less favorable year to realize gains. A year with lower income may present an opportunity to recognize gains at a reduced rate.
• Roth conversions. Converting traditional IRA assets to a Roth IRA generates taxable income in the conversion year. In lower-income years, conversions and gain recognition can sometimes be coordinated to use available bracket space efficiently.

These decisions are interconnected. A financial advisor can help model how gain recognition, withdrawals, and conversions interact across multiple years.

Estate Planning and the Step-Up in Basis

When an asset is inherited, the IRS resets its cost basis to fair market value on the date of the owner's death. This means the capital gains that accrued during the original owner's lifetime are effectively eliminated for the heir.

For example, stock purchased at $100,000 that grows to $1,000,000 by the owner's death would pass to the heir with a $1,000,000 basis. If the heir sells at $1,050,000, only the $50,000 of post-inheritance gain is taxable.

This has several planning implications:

• Holding vs. selling. For investors who don't need immediate liquidity, retaining highly appreciated positions in taxable accounts may result in less total tax for the family than selling during life.
• Gifting vs. bequeathing. Gifting appreciated assets during life transfers the donor's original cost basis to the recipient—no step-up occurs. Bequeathing those same assets provides a stepped-up basis.
• Interaction with asset location. The step-up applies to assets in taxable accounts but not to traditional IRAs or 401(k)s, where distributions to heirs are taxed as ordinary income.

A financial advisor can help evaluate how capital gains considerations fit alongside estate tax exposure, trust structures, and family goals.

How EP Wealth Can Help

Capital gains management for large portfolios typically requires coordination across investment decisions, tax strategy, charitable planning, and estate structures. EP Wealth's financial advisors work alongside our tax, financial, and estate planning teams to evaluate which strategies fit your circumstances and how they interact with one another.

If you'd like to discuss how capital gains considerations apply to your portfolio, contact EP Wealth to speak with an advisor.

DISCLOSURES

• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
• EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability.
• Hiring a qualified advisor and/or financial planner does not guarantee investment success and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made so that any direct or implied results or projections being represented here will be met or sustained.
• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
• EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of opinion are subject to change without notice.
• Tax matters can be complicated. All tax references are general in nature and are not intended to supersede professional advice. Please consult with an accountant and/or attorney before implementing any of the strategies discussed. EP Wealth Advisors is not engaged in the practice of law or accounting.