Bypass Capital Gains Tax Break

Normally, investors who sell assets like securities may benefit from favorable long-term capital gain treatment.

Strategy: Elect to forfeit the capital gains break if it suits your purposes. This might occur if you're deducting investment interest deduction on your personal return but need more investment income to increase your allowable deduction. The capital gain forfeit election must be made on the 2025 return due by April 15. Once you do it, it's irrevocable.

Here's the whole story: If you itemize, you can generally deduct investment interest expenses you incur — such as when you buy stock on margin — up to the amount of your net investment income for the year. Any excess investment interest is carried over to the next year. The issue is that the definition of "net investment income" for this purpose does not include long-term capital gains and qualified dividends, which are taxed at lower rates. This rule could severely limit your investment interest deduction. In fact, you may not be entitled to any deduction at all!

Potential fix: You can elect to include your chosen amount of long-term gains and/or qualified dividends in the computation of net investment income, but you must forgo the lower tax rate that would otherwise apply to the elected amount. This election is made when you file your tax return.

Example: Say that your top ordinary income tax rate in 2025 is 35%. During the year, you realized $50,000 in long-term capital gains and you incurred $40,000 in investment interest expense. By foregoing the lower tax rate on $40,000 of your capital gains, you can deduct the $40,000 of investment interest expense. That means that instead of paying $6,000 in tax on those capital gains (15% of $40,000), your tax bill for the capital gains is $14,000 (35% of $40,000). That's $8,000 more, but the increase in the investment interest deduction is worth $14,000 to you (35% × $40,000). Therefore, you save $6,000 overall ($14,000 − $8,000). Note that there's no turning back once you make the election.

Tip: The election is made on Form 4952, Investment Interest Expense Deduction.