Most advice on reducing capital gains tax is a list of schemes. The published rules already contain five reductions, every one of them written down by the IRS, and between them they account for almost every dollar anybody legitimately saves. None of them is clever. What they have in common is that four of the five must be dealt with before you sell, which is why this question is usually asked a month too late.
Hold it past a year, if you can
The largest single reduction available to most sellers is a calendar date. The IRS rule is that if you hold the asset for more than one year before you dispose of it, your capital gain is long-term, and if you hold it one year or less it is short-term. A short-term gain has no scale of its own: it is taxed with your ordinary income. A long-term gain is taxed on a scale where the rate for most individuals is no higher than 15%. Counting matters here: you count from the day after you acquired the asset up to and including the day you disposed of it.
Use the losses you already have
Losses net against gains before any rate is applied, so a loss realised in the same year is worth its full value against the gain rather than a deduction at some lower rate. Where losses exceed gains, the IRS allows the excess against ordinary income up to the lesser of $3,000, or $1,500 if married filing separately, or your total net loss, and anything above that carries forward to later years. Carried-forward losses from a bad year are an asset most people forget they are holding, and they do not expire.
The exclusion and the deferral, each with conditions
If what you are selling is your main home, the IRS publishes an exclusion of up to $250,000 of gain, or up to $500,000 on a joint return, subject to an ownership test and a use test. If it is investment real property, Section 1031 provides that generally, on a like-kind exchange, you are not required to recognize a gain or loss, though since the Tax Cuts and Jobs Act that applies only to real property and any cash or other property you receive is recognised to that extent. Neither is available retrospectively, and both are the reason to talk to an adviser before the sale rather than after.
Keep an eye on the two thresholds you can cross
Two published thresholds turn a good year into an expensive one. The first is the top of the 0% capital gains band, which the IRS sets at $48,350 of taxable income for single and married filing separately, $96,700 for married filing jointly and qualifying surviving spouse, and $64,750 for head of household: a gain realised in a low-income year can sit inside it entirely. The second is the Net Investment Income Tax threshold of $200,000, $250,000 or $125,000 depending on filing status, above which a further 3.8 percent applies to the lesser of net investment income or the excess. Splitting a disposal across two tax years is the ordinary way people stay under both.
Questions people ask about how to reduce capital gains tax
What is the single biggest legal reduction?
For most sellers it is the holding period. The IRS treats a gain on an asset held more than one year as long-term, taxed on a scale where the rate is no higher than 15% for most individuals, while a short-term gain is taxed with ordinary income at no special rate.
Can losses from previous years still help?
Yes. Where a net capital loss exceeds the annual limit, the IRS says you can carry the loss forward to later years, and it nets against future gains in full before any rate applies.
Does giving the asset away avoid the tax?
That is a question about your own facts and about gift rules, which this site does not answer in its own voice. What it publishes is what the authorities publish; putting your own disposal to a CPA or enrolled agent is what the enquiry form is for.
Does moving state before a sale work?
State treatment genuinely differs and the record on this site quotes each authority, but residency is a question of fact with its own rules and the federal charge follows you regardless. Read the quotations, then take advice on your own dates.