Is the Juice Worth the Tax Squeeze? Capital Gains

You just walked out of your accountants office, shocked about how much you owe in taxes, you ask, “Why? How?” “Simple,” they say, “Capital gains, dividends and interest.”

Sure it’s great that you made money, but that surprise $20,000+ tax bill still cuts deep. 2025 was a wild ride in the markets, you or your investment guy/gal made trades, defensive at first to protect yourself from the Tariff's, then you got back in when markets took off, next maybe you decided it was finally time to buy international stocks. Each time you buy and sell, in your non-retirement accounts otherwise known as brokerage accounts, individual accounts, trust accounts and joint accounts is a tax event. 

When you make money, you’ve now “Realized” a capital gain. How that gain is taxed depends on your total income, if you're married or single, the state you live in, if you have investment losses to offset, and how long you held the investment for.

Note: This table reflects 2026 Federal Tax Brackets for Long-Term Capital Gains. It is for informational purposes only. Consult a tax professional for your specific situation.

There is a saying, “Don’t let the tax tail wag the investment dog.” While, I largely agree, when you make changes that generate taxes, we must judge that decision on whether or not you are better off than before. Better off can mean many things, most obvious would be higher investment returns, but reducing risk could also be a very valid reason. But here's the thing, most times, when investors professional and individual alike make changes, their performance suffers, and that’s before taxes. Evidence of this is the consistency of passive index tracking strategies particularly in stocks and especially large stocks beating their active counterparts over 1, 5, 10 and so on time frames. The evidence gets particularly stark the further the time period is. Morningstar reports year after year.

If taking frequent action usually results in lower returns, and higher taxes, “What are we doing?”

Making changes feels proactive, adapting to the “Current environment.” However, what is usually happening is the opposite, it’s being reactive, making changes based on what happened yesterday and thinking it will continue to happen. 

Sometimes we should just sit on our hands. Maintaining the strategy isn’t, “Doing nothing.” Instead it’s actively staying the course. Being proactive is knowing that no one, including me, can predict the future with any kind of accuracy that gives us a reliable edge to make money. It’s why 90% or so of really smart, professional investment managers in the Large Cap US stock space haven’t beat their target index over the last 10 years (Morningstar). For the 10% or so that do, it then becomes incredibly hard to say how much is luck, or skill that you can rely on. I’d rather be lucky than good, but I don’t want to bet my investment future on luck.

That isn’t to say that active strategies are bad, or that it doesn't make sense to invest in them. I personally believe that it is important even as a passive investor like myself, that we have active investors. Active investors help keep our markets working properly, they evaluate price and sniff out fraud which is critical to a healthy investment environment. If you want to have above average returns, being a buy and hold index investor by definition cannot give you that, active could, but it could also deliver below average returns. 

No matter how we choose to invest, we are making some kind of bet on the future, a bet that we have no way of knowing will be right. My general philosophy on investing is also flawed. While I acknowledge that I cannot predict the future and that the past is no guarantee of future results, the only data we have is past data. I choose to invest my clients and myself in a globally diversified portfolio of stocks that track indexes. Note: not all clients are invested solely in stocks, but for this part of the conversation we will focus on stocks, bonds are a whole other piece, some of which we will touch on.

I don’t want to make much changes at all, my bet is that over time, humans will continue to make companies that make incrementally more money over time and thus deliver us investors returns. I just don’t know which ones, so I buy lots of them, thousands. 

Is my strategy perfect? Absolutely not, but it isn’t designed to be perfect, nor is it designed to give you better than index returns, rather it is designed with the goal to give what the market gives. From large US companies to small to international. Over the last 10 years or so large US companies have dominated the headlines and have had great returns, more specifically within that group it has been Tech companies that were the big winners. Over the next decade and beyond, who knows what group it will be, and I don’t care so much, because I cast a large net.

Most investors can afford to not be great investors (ie beat the market), but most cannot afford to be poor investors. Again this is why I chose to be mostly passive, I want to reduce my chances of being a below average investor.

The other benefit of sitting on your hands, it can be quite tax efficient. Fewer trades means fewer “Realized Gains”. Longer holding periods mean less chance of short-term capital gains that are taxed at your ordinary income tax rates, which can be as high as 37% on the Federal side. Important to note: when you don’t sell, gains don’t go away and you could just be pushing the tax burden into the future when you eventually sell. However, even then there are still benefits to delaying. Compound interest. Let’s say 2 investors make the same return, they each hold the same investment, but 1 sells each year, pays the tax and reinvests and the other holds for 10 years then sells all in year 10.

Then we must calculate the tax for year 10.

Charts assume $10,000 initial investment, 10% annual return and 15% Long-term capital gains tax rate. For illustrative purposes only. Real life will differ.

The Cherry on top. Let’s say you die, having not sold your investment and realizing the gain. Your heirs get a step-up on your cost basis. That’s the technical term for saying, all your investment gain from a tax perspective gets reset, using the example above, they would inherit the ending balances, $22,610 and $25,937 respectively. They would own the investment at those prices, so if they sold it all at those values they’d be able to keep the whole thing. In this example not selling each and inheriting this investment would have saved them $2,391 in capital gains taxes. This example is a relatively small investment, imagine if the numbers were multiplied by 10, or even 100. Counter argument: I have seen people get paralyzed by taxes. They just won’t sell an investment that they otherwise should because they can’t get over the tax. I’ve seen this cost GE investors dearly. For 20 years they held a losing investment, they would have been better off selling, paying tax and reinvesting into something else. Hindsight is always 20-20. I think investments first need to make sense within your overall strategy aiming to meet your growth, income and tolerance for fluctuations goals, only after that should taxes come into play. 

Another piece to the tax planning aspect of investments, goes by the term of asset location. We just described how to be more tax efficient with your stock investments by sitting on your hands. Another tool is choosing what type of investments to own in what type of accounts. Translation. Tax efficient investments go in taxable accounts and less tax efficient investments in retirement accounts. Further translation, generally stocks in taxable, bonds in retirement accounts. Remember the saying, “Don’t let the tax tail wag the investment dog?” This applies here, it’s important to find the balance between tax efficiency and creating an investment portfolio that actually helps you live a better life. But, where possible looking at your investment strategy through the lens of everything you have can help create a better overall strategy.

With investing, risk, taxes, timeline, should all come together. An all stock portfolio measured by say the S&P 500 has delivered excellent returns over the past 30 years. It did so tax efficiently as well I might add, but not without its challenges. If you had retired in 2000, you would have had to endure 2 declines of 50%. Declines that might have made the fear of running out of money very real. Those two declines would be incredibly hard to stay invested in, if you couldn’t stomach the losses and sold it would have been easy to miss the rally from 2009 through 2025. If you can’t stick with your strategy in good times and bad it makes it hard to capture your returns. Over trading, taxes and fees can eat away at your returns, if you are experiencing all three, how much value are you receiving?

If your advisor won’t say the word taxes, and doesn't invest with taxes in mind at all, then you’ve got an investment manager not a personal financial advisor. I’m not against active strategies, my way is not the only way, Warren Buffett once noted that unlike baseball, in investing there aren't 3 strikes and you are out, he noted that he can wait for the pitch he likes and watch strike after strike go by. What works for Buffet, might not work for you, as for me I’m looking for simplicity where possible, especially around investments.

Another benefit of not over trading your account. More control over your income. For early retirees this could mean qualifying for cheaper healthcare because you didn’t generate $100,000 in capital gains that push you over the income cliff to qualify for tax credits under the Affordable Care Act, maybe that savings is enough for you to make the jump to retire at 63 instead of waiting for Medicare. Financial planning should work hand and hand with your investment strategy.

At Tomkiewicz Wealth Management we don’t run from the word taxes, it is a critical part of our process. I believe in creating a strategy looking at the big picture which can’t be done from investments alone.

The information in this blog is the opinion of Nathan Tomkiewicz and does not reflect the views of any other person or entity unless specified. The information provided is believed to be  reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Tomkiewicz Wealth Management, LLC, an investment adviser registered with the State of New York and Massachusetts.