Last year was a solid year for investors, with double-digit annual returns for the third year in a row, but now you can expect to pay taxes on those winnings. The S&P 500 index soared 16% in 2025, marking the third straight year of double-digit gains as artificial intelligence trading boosts the market. But those prizes will come at a price once tax season is in full swing. “After strong equity growth, strong sales, and active consumer participation in 2025, we are concerned that (short-term) capital gains could become a negative tax surprise that offsets the well-publicized positive effect of increased tax refunds,” Savita Subramanian, equity and quantitative strategist at Bank of America, said in a note earlier this month. Individual investors who consistently buy and sell .SPX 1Y Mountain S&P 500 positions over the past 12 months could find themselves in a big tax hit. Short-term capital gains on assets bought and sold within one year are taxed at the same rate as ordinary income, which is a top marginal tax rate of 37%. In particular, the most active traders are likely to get caught up in large amounts of taxable trades. “Especially with the younger generation, everything is done on apps and you trade your life for it,” said Miklos Ringbauer, a certified public accountant and founder of MiklosCPA in Los Angeles. “Press a button and execute commission-free on your trading platform.” There’s not much you can do about last year’s taxable income, but you can take some steps to minimize the impact in the future. Recover and Rebalance Losses Work with your financial advisor and accountant to identify holdings that make sense to sell and develop a plan to exit those assets in a tax-efficient manner. First, check to see if you have losses that can offset your capital gains. If the loss exceeds the capital gain, $3,000 of the loss could reduce ordinary income. Additional losses are carried forward for future use. Investors who do this should be aware of wash sale rules. This includes selling an asset to lock in a loss and purchasing a “substantially identical” replacement within 30 days before or after the transaction. In this case, the Internal Revenue Service will protect you from losses. This move may also be linked to portfolio rebalancing. In this case, if your portfolio is too biased towards one sector or a particular stock, the proceeds from the sale can be used to buy stocks in another corner of the market. Donations Another approach with the same effect is to donate low-cost, high-value assets to eliminate overconcentration in your portfolio. By donating appreciated stock to charity, you can receive a full deduction from its fair market value without incurring a taxable capital gain. “If you’re just donating stock, there’s no reason to use cash and earn taxable income (from selling stock),” said Henry Guses, principal manager of tax and ethics at the American Institute of Certified Public Accountants. “It’s a way to achieve multiple goals.” Know what you own Mutual funds distribute capital gains that can expose investors to taxes or surprises. “You’re not putting (the money) in your pocket, but if the fund is in a taxable account, the IRS is going to tax it,” said Dan Herron, a certified public accountant and financial planner with Elemental Wealth Advisors in San Luis Obispo, California. Mutual funds distribute capital gains whenever a portfolio manager makes a profit on a particular holding or is forced to raise cash to pay for shareholder redemptions. These profits are distributed to remaining shareholders and are taxable, potentially resulting in short-term and long-term capital gain distributions. These distributions may also appear if the fund had high sales but losses were insufficient to offset gains. Investors who like the fund’s strategy may want to look for tax-efficient exchange-traded funds instead, Herron said. You may also want to reconsider which accounts you use to hold these funds. Tax-deferred accounts, such as 401(k)s and individual retirement accounts, are a good place to store assets that segregate income and gains and avoid taxes until withdrawals are made. “We’re putting more income-producing assets into tax-deferred accounts,” Herron said.
