In our Primer on the Tax on Capital Gains we explain how the step-up in basis allows those who inherit property avoid the tax on capital gains as well as the $250,000 exclusion on the sale of one’s personal residence. But there’s another way to avoid the tax if your income or that of your beneficiaries is low.
Capital Gains Tax Thresholds
On the federal level, there’s no tax on capital gains if your income is under approximately $50,000 ($48,351 in 2025) for an individual and $100,000 ($96,701 in 2025) for a married couple filing a joint return. So, if your income is below these levels you can sell some appreciated stock without incurring any tax on the capital gain. But remember, the capital gain will be added onto your other income in determining your capital gains tax rate.
So, for instance, if you are single and your other taxable income totals $35,000, you can sell stock generating up to about $15,000 ($13,350 to be exact in 2025) without incurring any tax. If you are married with taxable income of $70,000, you can sell stock generating up to about $30,000 (again, $26,700 to be exact in 2025) without incurring any tax.
This may only help some people on the margins, but if you qualify you may be able to chip away at your highly-appreciated holdings by selling a little each year. Also, remember that these tax thresholds apply after taking deductions. So, for instance, if you incur high medical or long-term care expenses during a particular year, you may be able to liquidate shares of stock to pay those costs without incurring taxes.
Gifting Highly-Appreciated Shares of Stock
But there’s another strategy that might reap higher tax savings. Typically older investors do not liquidate their highly-appreciated investments because they know that when they pass away, due to the step-up in basis, their heirs will be able to do so with no tax consequences. They also refrain from making gifts of such property to their children or grandchildren because they would receive it with the same basis, known as a “carry over” basis. And often even if the parents are now retired and have relatively low income, their children are still working and earn enough so they would not qualify for any tax free capital gains.
But that’s not always the case. In some instances, the children may not be working whether because they are raising children, have lost their job, are in school, or are disabled. In such cases, they may have more room between their income and the capital gains tax threshold to sell stock without incurring any tax.
More likely still, grandchildren who are still in school are earning little or no money and may have a larger margin for selling stock without incurring any tax. A grandparent, in theory (see below), would be able to give a grandchild $50,000 of stock that they could sell, incurring $30,000 of capital gain, with no tax resulting. If they did this for four grandchildren, they could together realize $120,000 of gain with no tax.
But Beware the Kiddie Tax
Unfortunately, however, this plan probably won’t work due to the kiddie tax, which applies the parents’ tax rate to a child’s unearned income above $2,700 (in 2025). This rule applies to all children under age 18 and those who are full-time students up to age 24.
As a result, the scheme of transferring highly-appreciated assets to grandchildren in most cases only works for low-income grandchildren aged 24 or older and those from 18 to 23 who are not full-time students.
All this said, these ways of avoiding the taxes on capital gain may only help some taxpayers on the margin, but they can be useful, especially for those who own highly-appreciated assets and would diversify their holdings if it were not for the tax on capital gains.