Big market returns and active trading can bite investors at tax time. How to manage the hit

Last year was solid for investors who captured a third straight double-digit annual gain – and now they can expect to take a tax hit on those winnings. The S & P 500 surged 16% in 2025, the third consecutive year of double-digit gains as the artificial intelligence trade lifted the market. With tax season in full swing, however, those winnings will come at a price. “After 2025’s strong equity gains, high turnover and aggressive retail participation, we worry [short term] capital gains could be the negative tax surprise that offsets the well-telegraphed positive of higher refunds,” wrote Bank of America equity and quant strategist Savita Subramanian in a report earlier this month. .SPX 1Y mountain S & P 500 in the past 12 months Retail investors who are constantly buying and selling positions could find themselves on the hook for a big hit from taxes. Short-term capital gains on assets bought and sold within one year are taxed at the same rate as ordinary income: a top marginal rate of 37%. It’s especially easy for the most active traders to get ensnared in a pile of taxable transactions. “Especially with the younger crowd, everything is on an app, and you trade your life away,” said Miklos Ringbauer, CPA and founder of MiklosCPA in Los Angeles. “You push a button and you get commission-free execution on a trading platform.” There isn’t a whole lot you can do for last year’s taxable gains, but you can take a few steps to minimize the future hit. Tax-loss harvesting, rebalancing Work with your financial advisor and your accountant to find holdings that might make sense to jettison, and draw up a plan to part with those assets in a tax-efficient manner. For starters, see if there are losses you can realize to offset your capital gains. If losses exceed capital gains, as much as $3,000 of the losses can reduce your ordinary income. Any additional losses carry over for use in future years. Investors doing this will want to be aware of the wash sale rule: This involves selling an asset to lock in a loss and then buying a “substantially identical” replacement within 30 days before or after the transaction. In this case, the Internal Revenue Service keeps you from taking the loss. This move can go hand-in-hand with portfolio rebalancing, too. In this case, if a portfolio is too heavily weighted toward one sector or a specific stock, proceeds from any sales can be used to purchase shares in a different corner of the market. Donations Another approach that has the same effect is to donate appreciated assets with a low cost basis in order to do away with any heavy concentrations in your portfolio. By donating appreciated stocks to charity, you can collect a full deduction for the fair market value without incurring any taxable, capital gains. “There is no reason to use cash and generate taxable income [from selling shares] if you can just donate the stock,” said Henry Grzes, lead manager for tax practice and ethics with the American Institute of CPAs. “That’s a way to achieve multiple goals.” Know what you own Sometimes mutual funds can distribute capital gains, leaving investors on the hook for taxes and catching them off guard. “You didn’t put [the money] in your pocket, but the IRS is going to tax it if the fund is in a taxable account,” said Dan Herron, CPA and financial planner at Elemental Wealth Advisors in San Luis Obispo, Calif. Mutual funds distribute capital gains whenever a portfolio manager takes a gain on a particular holding, or is forced to raise cash to meet shareholder redemptions. Those gains are distributed to remaining shareholders — and are a taxable event, likely generating both short- and long-term capital gain distributions. You might also see these distributions if the fund saw a lot of turnover but had insufficient losses to offset the gains. Investors who like the fund’s strategy may want to look for a tax-efficient exchange-traded fund instead, Herron said. They might also want to rethink which account they’re using to hold these funds. Tax-deferred accounts, like a 401(k) or an individual retirement account, can be a better place for assets that spin off income or gains, and avoid any taxes until withdrawals are taken. “We put more income producing assets in tax-deferred accounts,” Herron said.