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How to erase capital gains (legally)
Published about 2 months ago • 5 min read
Here's your weekly helping of interesting investing information and insights.
Food For Thought
My youngest turns 21 in less than four years. When that day comes, the custodial account we started for her stops being "mine to manage" and becomes hers, free and clear.
And she's going to inherit a little tax problem.
Let me show you.
For example, she owns 4.1436 shares of Caterpillar (CAT). Her average cost is $174.33 a share.
Today that position is sitting on a gain of $3,224.07.
That gain is an eventual tax bill waiting to happen. Whenever she sells — at 22, at 30, whenever — she owes tax on it. And by then, she'll probably have a real job and a real tax rate.
Right now? She's a student with no income. Her tax rate is basically zero.
So we're planning to use her zero-tax years to lighten the tax load before she inherits it and the mover we're looking at is tax gain harvesting.
Two terms, fast:
Tax LOSS harvesting = you sell a loser on purpose. The loss cancels out gains elsewhere and can knock up to $3,000 off your regular income. Best in high-income years. Catch: you can't buy that same stock back for 30 days (the "wash sale" rule).
Tax GAIN harvesting = you sell a winner on purpose, when your tax rate is 0%. You pay no tax, then buy it right back. Best in low-income years — early retirement, a sabbatical year, or a kid's account. And here's the best part: there is NO wash sale rule for gains. You can sell and rebuy seconds later.
That second one is what we're planning on doing in both of our daughters' custodial accounts.
So why bother?
Because when I rebuy, her cost basis resets to today's price.
She goes from a cost of $174 a share to about $952 a share. That $3,224 gain? It gets erased — not hidden, actually erased — and it never gets taxed.
Do it every year for a few years and by her 21st birthday, that tax bill will be way less. She inherits an account she can actually sell from and pay way less in taxes.
but, how much can I harvest tax-free?
This is where the "kiddie tax" comes in. Kids can't just rack up unlimited investment income at their own low rate — the IRS caps it. Here's the ladder for 2026:
So my magic number is $2,700 a year, per kid.
One wrinkle: dividends count toward that $2,700 too. CAT pays her about $27 a year. So my real harvest budget is $2,700 minus every dividend she collects.
The paperwork catch: once her investment income tops $1,350, she has to file a federal tax return — even though she owes zero. Fine by me. If I'm filing anyway, I'm using the whole $2,700, not stopping at $1,800.
(Because we're in Illinois: our state has no kiddie tax, but we must stay under $2,925 in income or she loses her whole exemption and pays 4.95% on everything! Staying under $2,700 keeps us safe on both.)
Two things I'm watching
This money is legally hers. At 21 she can spend it on a car, a trip, or nothing at all. I'm just making it tax-efficient for her.
Financial aid. Custodial accounts count as student assets on the FAFSA and get hit hard. If your kid is chasing need-based aid, talk to somebody smart before you harvest anything.
Brian Bollinger from SimplySafeDividends.com found and highlighted three high yield dividend stocks that have been better than SCHD... and I currently own one of them!
Trump Accounts are new, tax-advantaged investment accounts for children that allow families and employers to build long-term wealth. Children born between 2025 and 2028 receive an initial $1,000 government deposit, which is then invested in the stock market and can be used for future goals like education or buying a home. Motley Fool's Hidden Gems Investing podcast dove into the nuts and bolts of these accounts and shared their thoughts if they're the best choice.
Disclaimer: This is not investment advice. Do your own research before making any investment decisions.
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