Tax Planning · 7 min read
When Avoiding a Tax Bill Costs More Than the Tax
On a $500,000 gain in shares held more than a year, the 2026 federal tax runs from roughly $74,000 to $119,000 for a married couple, depending on their other income: a 15 or 20 percent capital gains rate plus a 3.8 percent surtax above $250,000 of income. That number can be calculated before a share is sold. The cost of keeping most of a family’s wealth in one company cannot. Holding is sometimes right — when the shares are headed for an estate, when a sale is restricted, or when a better tax year is a dated wait away. The rest of the time, the tax is the smaller risk.
“Never sell. You’ll pay the tax.” We hear the sentence from households holding a large gain in one stock: an employer’s shares, a founder’s stake, a position a parent bought decades ago. The tax is real, and it is not small. But the sentence treats one risk as the only risk, and the other risk does not appear on any statement.
The sentence every concentrated holder says
The logic runs in three steps. Selling triggers a tax; not selling does not; therefore holding is free. The first two steps are true. The third is where families go wrong, because holding has a cost of its own: most of the household’s wealth rides on one company’s future. The tax can be worked out to the dollar in advance. The other risk cannot.
What the tax actually is on a $500,000 gain
Shares held for more than one year produce long-term capital gain (26 U.S.C. §1222(3)). For 2026, the federal rate on that gain is 0, 15, or 20 percent, set by taxable income. For a married couple filing jointly, the 0 percent rate ends at $98,900 of taxable income and the 15 percent rate ends at $613,700; above that, 20 percent. For a single filer the lines are $49,450 and $545,500 (Rev. Proc. 2025-32, §4.03).
Then the surtax. The net investment income tax adds 3.8 percent on the lesser of investment income or modified adjusted gross income above $250,000 on a joint return and $200,000 for a single filer, thresholds the statute does not adjust for inflation (26 U.S.C. §1411(a)–(b)).
Here is the arithmetic for a married couple with a $500,000 long-term gain in 2026. Federal tax only; state income tax, where it applies, is additional.
| The couple’s situation | Capital gains tax | 3.8% surtax | Federal total | Kept after federal tax |
|---|---|---|---|---|
| $50,000 of other income: $81,100 of the gain fits under the 0% line, $418,900 is taxed at 15%; surtax on the $300,000 above $250,000 | $62,835 | $11,400 | $74,235 | $425,765 |
| Income already above $250,000; the whole gain lands in the 15% tier | $75,000 | $19,000 | $94,000 | $406,000 |
| Taxable income above $613,700; the whole gain is taxed at 20% | $100,000 | $19,000 | $119,000 | $381,000 |
Illustrative. Not a recommendation. The table uses the 2026 joint thresholds and the $32,200 standard deduction; ordinary income fills the brackets first and the gain stacks on top, so a gain that straddles a line is taxed in pieces (Rev. Proc. 2025-32, §§4.03, 4.14). In every row the household keeps 76 to 85 cents of each dollar of gain. The point is not that the tax is small. The point is that it is knowable, and capped.
What the other risk is
A single company’s stock is a very different thing from the stock market. A study of every U.S. common stock listed from 1926 to 2016 found that the best-performing 4 percent of companies explain the entire net gain of the market over that period; the remaining companies, taken together, matched one-month Treasury bills, and most individual stocks earned less than Treasury bills over their lifetimes (Bessembinder, Journal of Financial Economics 129(3), 2018).
The paper puts it carefully, and so should we. A diversified portfolio owns the few companies that carry the market. A single large position is a bet that this company stays one of them. The bet has paid off so far; whether it should carry the household’s retirement is a separate question.
Set the two risks side by side. The tax deferred by holding is, at most, about 24 cents on each dollar of gain. A share price does not need a disaster to fall by more than that in a year, and if it does, the tax bill shrinks along with the wealth.
The middle paths
The choice is rarely sell everything or hold everything. We describe the paths between the two; which, if any, fits a household depends on its income, its horizon, and its intentions for the money.
- Staged sales across tax years. Each year’s gain is taxed against that year’s income, so selling in tranches can keep more of the gain under the $613,700 line and the surtax threshold. The trade is time: whatever remains unsold stays exposed.
- Low-income years. The years between leaving work and the start of Social Security or required withdrawals often carry unusually low taxable income. Gain that fits under $98,900 of joint taxable income is taxed at 0 percent in 2026 (Rev. Proc. 2025-32, §4.03). The mechanics are in our guide to the 0 percent bracket.
- Gifting appreciated shares. The recipient takes over the giver’s original purchase price, so the gain travels with the shares and is taxed at the recipient’s rates when they sell (26 U.S.C. §1015(a)). The gift-tax rules apply. The tax is relocated, not removed.
- A donor-advised fund or a direct gift to charity. Long-term appreciated shares given to a public charity are generally deductible at full market value, within a 30 percent-of-income limit, and the built-in gain is never taxed by anyone (26 U.S.C. §170(b)(1)(C), (e)(1)(B), (f)(18)). The money leaves the family. That is the purpose, not a side effect.
- Direct indexing. The household owns hundreds of individual stocks instead of one fund, and the ones that fall are sold to realize losses that offset gains taken from the concentrated position. It reschedules the tax rather than removing it, and only to the extent losses exist. See how we use direct indexing.
- Exchange funds. Several concentrated holders contribute shares to a partnership and each receives a diversified interest. The contribution is generally not taxable (26 U.S.C. §721(a)), unless the partnership would count as an investment company, which is why these funds hold part of their assets outside marketable securities (§721(b); Treas. Reg. §1.351-1(c)(1)). Contributed property passed to another partner within seven years triggers the original gain, hence the seven-year hold (26 U.S.C. §704(c)(1)(B)). The original purchase price carries over; the tax is deferred, not removed; access is generally limited to larger investors.
When holding is right
Sometimes the sentence is correct. Three situations stand out.
A step-up horizon
Property inherited from someone who has died takes a new starting value equal to its market value on the date of death, and the gain built up during the owner’s lifetime is never taxed as income (26 U.S.C. §1014(a)). For an older holder who does not need the money and intends to leave the shares, the tax the sentence fears may never be paid. The single-company risk runs for the whole of that horizon, and the heirs inherit it with the shares. Our guide to the step-up covers what the rule does and does not erase.
A restriction
Executives inside trading windows, founders under a lock-up, and anyone holding unvested awards are not choosing to hold; the choice has not arrived yet. The planning work is to decide the sequence now, so the first open window meets a plan rather than a reflex.
A dated wait
Shares a few months short of the one-year line would be taxed as ordinary income if sold today. A household twelve months from a known low-income year can see the 0 percent line ahead. Waiting a defined time for a defined saving is a decision; the difference from the sentence is a date on a calendar.
Holding is right when it is chosen, sized, and dated. It is avoidance when it is none of the three.
What this does not mean
Nothing here recommends selling, holding, gifting, or contributing any position; we have described rules and trade-offs, not a recommendation for any household. The figures are federal, for 2026, for a married couple filing jointly; state income tax and the alternative minimum tax are outside the table.
A large gain also raises the year’s adjusted gross income, which feeds Medicare premium surcharges and the taxation of Social Security benefits. Incentive stock options and employer stock inside a retirement plan carry their own rules. And nothing above is a view on any company’s prospects; the plan should not depend on one. When tax planning distorts the portfolio takes up the broader version of the same problem.
Frequently asked questions
Is the 3.8 percent surtax charged on the whole gain?
Not always. It applies to the lesser of investment income or the amount by which modified adjusted gross income exceeds $250,000 on a joint return, or $200,000 for a single filer. A couple with modest other income pays it on less than the full gain. The thresholds are not indexed for inflation (26 U.S.C. §1411).
Does spreading a sale over several years always lower the tax?
Only when it keeps more of the gain under a line: the $98,900 zero-rate amount, the $613,700 top of the 15 percent tier, or the $250,000 surtax threshold for a couple. A household above all three every year changes the timing, not the total. And the unsold shares stay exposed while it waits.
Can an exchange fund make the tax disappear?
No. Contributing shares is generally not taxed, but the original purchase price carries into the new interest and the gain is recognized when that interest is sold. The seven-year hold and the fund’s non-marketable assets exist to satisfy the partnership rules that make the deferral work (26 U.S.C. §721; §704(c)(1)(B)).
If the shares go to my children when I die, does the tax go away?
Under current law the income tax on the lifetime gain does, because the heirs take the market value at death as their starting point (26 U.S.C. §1014(a)). The estate-tax rules are separate, the law can change, and the single-company risk runs the full length of the wait and then passes to the heirs. The step-up is a reason to consider holding, not a reason to stop deciding.
Sources and further reading
- IRS Rev. Proc. 2025-32, §4.03 (2026 capital gains rate thresholds) and §4.14 (2026 standard deduction)
- 26 U.S.C. §1411 — net investment income tax (3.8 percent; $250,000 joint / $200,000 single thresholds)
- 26 U.S.C. §1222(3) — long-term capital gain: a capital asset held for more than one year
- Bessembinder, H., “Do stocks outperform Treasury bills?”, Journal of Financial Economics 129(3), 2018, pp. 440–457
- 26 U.S.C. §1014 — basis of property acquired from a decedent (the step-up)
- 26 U.S.C. §170 — charitable contributions of appreciated property; donor-advised fund acknowledgment
- 26 U.S.C. §721 — contributions to a partnership and the investment-company exception (with §704(c)(1)(B) and Treas. Reg. §1.351-1(c)(1))
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The views and opinions expressed here are those of The Financial Sciences Company as of the publish date and are provided for informational and educational purposes only. They are not personalized investment, tax, or legal advice. The Financial Sciences Company, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. Additional information is available in our Form ADV at adviserinfo.sec.gov.
General educational information, current as of 2026. Figures and rules change. For guidance specific to your situation, speak with a qualified professional.