Capital Gain Bunching and Timing Strategies to Reduce Taxable Income

How capital gain bunching works (step-by-step)

Capital gain bunching is a tax-aware selling strategy: instead of selling appreciated assets whenever convenient, you plan the timing and the amount of realized gains to minimize tax. The core idea is to keep more of your gain taxed at the lower long-term capital gains rates (0%, 15%, 20%) and to avoid pushing additional income into higher ordinary income brackets or triggering the Net Investment Income Tax (NIIT).

Key mechanics:

• Holding period: Assets owned more than one year qualify for long-term capital gain rates, which are lower than ordinary income rates (IRS Topic No. 409). (https://www.irs.gov/taxtopics/tc409)
• Rate buckets: Long-term gains are taxed in slices: up to the 0% threshold, then 15%, then 20% for the highest taxable incomes. These thresholds are indexed annually; check the current IRS tables before planning. (IRS – Capital Gains and Losses)
• Interaction with ordinary income: Realized gains increase your taxable income and may change which slice of gain is taxed at each rate.
• NIIT: High-income taxpayers may pay an additional 3.8% NIIT on net investment income when MAGI exceeds certain thresholds (generally $200k single / $250k married filing jointly). That can change the net benefit of bunching. (IRS – Net Investment Income Tax)

Practical strategies to bunch and time gains

1. Sell into a low-income year

• If you expect a year with materially lower ordinary income (e.g., planned retirement, unpaid sabbatical, business loss, or reduced wages), realizing gains in that year may keep gains taxed at 0% or 15% rather than 20% plus NIIT. Coordinate wage timing, retirement plan distributions, and Roth conversions around this window.

1. Slice gains across years

• Spread a large gain across multiple tax years: you can sell portions of a position over consecutive years to keep each year’s taxable income below the next higher rate threshold. This is often the simplest and most reliable approach for investors without urgent liquidity needs.

1. Use installment sales for eligible assets

• For seller-financed transactions (e.g., selling a business or some real estate), an installment sale lets you report gain as payments arrive, spreading income and potentially keeping each year’s taxable income lower. Be mindful of interest income and exceptions (certain dispositions and related-party rules). Consult IRS Publication 537 for installment sale rules.

1. Pair gains with realized losses (tax-loss harvesting)

• Sell underperforming holdings to realize losses that offset gains. Losses first offset gains of the same type, then net capital gains vs. ordinary income up to $3,000 per year (excess carries forward). See our Tax-Loss Harvesting Strategies guide for step-by-step approaches. (https://finhelp.io/glossary/tax-loss-harvesting-strategies/)

1. Use exchanges and deferrals when available

• For real estate, a Section 1031 like-kind exchange (limited to real property after recent tax law changes) can defer gain until a later sale. Qualified Opportunity Funds offer deferral/step-up options for some gains if rules are followed strictly.

1. Consider wash-sale and basis issues

• The wash-sale rule prevents immediate repurchase of the same or substantially identical security within 30 days if you want to claim a loss, but it doesn’t apply to gains. Accurate basis tracking is critical to avoid reporting errors and IRS letters.

1. Coordinate with other tax events

• Plan around Roth conversions, large IRA distributions, or itemized deductions that phase out with income. Bunching gains into years where deductions or credits are available (or where phaseouts are minimized) can create a larger net tax benefit.

Examples (conceptual)

Example A — Slicing a large long-term gain:

• You hold stock with $150,000 long-term gain and expect ordinary income around $60,000 annually. Selling everything in year one might push much of the gain into the 20% bracket and trigger NIIT. Selling $50k of gain for three years could allow more gain to be taxed in the 15% or 0% slices, reducing total tax owed.

Example B — Low-income year conversion:

• A business owner expects a $0–$20k income year after closing a company. Realizing gains that year could shift a portion into the 0% LTCG bracket. That same window can be used for Roth conversions at low ordinary rates.

Note: The actual tax owed depends on filing status, deductions, and current-year thresholds. Always check current IRS thresholds before finalizing a plan.

When bunching is most effective (use cases)

• Individuals approaching retirement with substantial appreciated assets.
• Investors with concentrated positions who need liquidity but can control sale timing.
• Business owners with unpredictable income who can plan sales around lower-income years.
• Estates or beneficiaries who inherit assets with stepped-up basis (different rules apply).

When bunching is less effective or risky

• If market conditions force a sale (need for cash, margin calls), tax timing should not dictate an economically poor transaction.
• If the gain size is small relative to your ordinary income, tax savings may be minimal.
• When transactions would trigger additional taxes or penalties (early distribution from retirement accounts, recapture for depreciation on real estate).

Interaction with Net Investment Income Tax (NIIT)

The 3.8% NIIT is a separate surtax on lesser of net investment income or the excess of MAGI over the NIIT threshold (generally $200k single, $250k married filing jointly). Bunching that reduces MAGI below the NIIT threshold can yield outsized benefits because it avoids both higher LTCG rates and the NIIT. See the IRS NIIT page for details. (https://www.irs.gov/individuals/net-investment-income-tax)

For more detail on how NIIT applies, see our glossary entry on Net Investment Income Tax. (https://finhelp.io/glossary/net-investment-income-tax-niit/)

Checklist before you act

• Recalculate your projected taxable income for the year and next year.
• Confirm the assets meet long-term holding requirements when targeting LTCG rates.
• Run scenarios that include NIIT, Medicare surtaxes, and state capital gains taxes.
• Consider transaction costs, market timing risk, and liquidity needs.
• If using installment sales or 1031 exchanges, confirm legal and reporting requirements.
• Talk to a CPA or tax advisor to document the plan and ensure compliance.

Common mistakes to avoid

• Assuming gains are taxed at a flat single rate—remember gains are taxed in slices and interact with ordinary income.
• Forgetting state taxes: many states tax capital gains as ordinary income; state thresholds vary.
• Overlooking the NIIT or accelerated recognition through corporate distributions.
• Ignoring wash-sale rules when harvesting losses to offset gains.

Tools and resources

• IRS Topic No. 409: Capital Gains and Losses (https://www.irs.gov/taxtopics/tc409)
• IRS Net Investment Income Tax information (https://www.irs.gov/individuals/net-investment-income-tax)
• For rules on installment sales: IRS Publication 537 and instructions for Form 6252.
• Our internal resources on tax-efficient planning: Tax-Loss Harvesting Strategies (https://finhelp.io/glossary/tax-loss-harvesting-strategies/), Long-Term vs. Short-Term Capital Gains Tax (https://finhelp.io/glossary/long-term-vs-short-term-capital-gains-tax/), and Capital Gains Harvesting vs. Tax-Loss Harvesting (https://finhelp.io/glossary/capital-gains-harvesting-vs-tax-loss-harvesting/).

Professional note and disclaimer

In my practice as a financial planning editor working with CPAs and CFPs, I’ve seen well-timed gain realization save clients thousands — but the benefits depend on up-to-date thresholds, state tax rules, and individual circumstances. This article is educational only and does not replace personalized tax advice. Consult a qualified tax professional before executing bunching strategies.