Preserving gains from tax pains: High-net-worth tax strategies

When it comes to building wealth, making money is only half the battle. Overpaying on taxes can keep even the world’s top earners stuck on a plateau as they move into higher income brackets. 

That’s why many high-net-worth individuals (HNWIs) use deductions, deferrals, and other advanced planning tactics – along with support from CPAs for personalized guidance – to minimize what they owe to the IRS.

In this guide, we’ll explain the most common high-net-worth tax strategies and how taxpayers use them to protect and grow their wealth.

Who are high-net-worth individuals (HNWIs)?

An HNWI is someone with a net worth of at least $1 million. This doesn’t mean they need $1 million in cash – but they must hold at least that amount in liquid or easily convertible assets, such as stocks, bonds, or cryptocurrencies. If an HNWI were to sell these assets, they’d have $1 million or more in cash.

There are also two wealth tiers above HNWIs: very-high-net-worth individuals (VHNWIs) and ultra-high-net-worth individuals (UHNWIs). The only difference between these categories is their higher minimum thresholds – VHNWIs hold at least $5 million in liquid assets, while UHNWIs have $30 million or more.

Investment tax strategies for high-net-worth individuals 

Since HNWIs typically have diverse assets and income streams, they face more potential tax liabilities. Without solid strategies, HNWIs risk losing a significant portion of their wealth to high tax burdens. For this reason, many HNWIs work with CPAs to avoid errors and claim as many deductions as possible, especially with new and volatile asset categories like cryptocurrencies.

Tax-loss harvesting 

When HNWIs realize significant profits after selling investments, they may consider strategically letting go of losing positions to offset gains. This tax-loss harvesting strategy uses capital loss deductions to offset any capital gains for the year. If capital losses exceed capital gains, individuals can deduct up to $3,000 of net capital losses against ordinary income annually – any excess from this cutoff can be carried forward to future years. Tax-loss harvesting can be particularly beneficial for HNWIs holding digital assets with unrealized losses.

High-income tax planning for capital gains

Besides offsetting capital gains with losses, many taxpayers – not just HNWIs – consider timing when deciding whether to sell an investment. This is because the IRS applies different capital gains tax rates to assets like stocks and cryptocurrencies depending on how long they’re held. 

Short-term capital gains are taxed at an individual's ordinary income tax rate, which can be steep for HNWIs in higher tax brackets. Conversely, long-term capital gains are taxed at lower rates that are generally more favorable for high earners.

To qualify for long-term capital gains, taxpayers must hold an asset for over one year before selling. This means planning an investment's time horizon – and sticking to that plan – can significantly reduce the amount owed on profitable positions.

Passive income strategies

Investments like dividend-paying stocks or crypto staking offer HNWIs additional ways to earn income while holding assets, but those earnings are still subject to income tax. One way to reduce the tax burden is using tax-advantaged accounts like traditional IRAs or 401(k)s to buy dividend-paying assets. In these accounts, dividends grow tax-deferred until withdrawal. 

In some cases, taxable dividends may also qualify for more favorable tax treatment if they meet the criteria for qualified dividends, which are taxed at a lower rate than ordinary income.

Municipal bonds 

For HNWIs seeking tax-free income, municipal bonds (munis) are a typical tool. These debt securities, which state and local governments issue, provide interest income exempt from federal income tax. In many cases, investors who hold munis issued in their state of residence also avoid state and local taxes on this income. 

Because of this tax-exempt status, municipal bonds typically offer lower yields than taxable bonds. However, the potential savings on IRS liabilities make them an attractive option for HNWIs in higher tax brackets. For those with a crypto-heavy portfolio, municipal bonds can help diversify from taxable investments with a steady, tax-free income stream. 

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Wealth tax planning for transferring estates  

Besides saving on taxes in the present, HNWIs take great care to preserve as much as possible for the future. For HNWIs, planning for wealth transfer after death is as much about setting clear intentions as it is about using the right tools to preserve capital for beneficiaries.

Annual gift exclusion

The IRS sets annual thresholds for how much an individual can give without filing a gift tax return. For example, in 2024, an HNWI could give up to $18,000 per recipient. While gifts above this threshold require filing a gift tax return, gift tax is not generally owed if the donor has not exceeded their lifetime exemption (see below). For crypto investors, this means they can gift cryptocurrencies at their fair market value (FMV) up to the lifetime exemption without incurring taxes. This strategy is useful for HNWIs who want to gradually pass on assets and lower their estate's overall tax burden.

Lifetime gift exemption

The lifetime gift exemption allows HNWIs to transfer a larger cumulative amount during their lifetime without paying federal gift taxes. In 2024, the exemption was $13.61 million per individual, though this figure changes annually. It’s important to note that using any portion of the lifetime exemption during life reduces the amount available for the estate tax exemption upon death. Additionally, the annual gift tax exclusion ($19,000 per recipient in 2025) is separate, meaning gifts up to that amount per person per year don’t reduce the lifetime exemption, though amounts exceeding it do.

Irrevocable trusts

When grantors transfer assets into an irrevocable trust, they relinquish ownership and remove these assets from their taxable estate. This strategy helps reduce an HNWI's estate taxes and may also protect the assets from creditors and lawsuits. Irrevocable trusts are particularly useful for holding cryptocurrency because they simplify the transfer process and help avoid future estate tax implications if the value of the crypto rises.

Charitable giving

Donating to charities isn't just an act of generosity – it can also reduce an HNWI’s taxable estate and qualify for deductions. Donating cryptocurrencies to a qualifying nonprofit lets HNWIs avoid paying capital gains on appreciated assets, which may result in a tax deduction. For HNWIs with larger estates, establishing a charitable trust can offer even greater tax advantages while supporting long-term philanthropic causes.

Real estate tax planning strategies for high-net-worth individuals

Property has long been a prized asset category for HNWIs. Besides the lifestyle benefits real estate offers, HNWIs may also get into the property game to take advantage of a few tax benefits.

Depreciation

HNWIs who invest in income-generating properties like rentals often use depreciation to create tax savings based on the wear and tear of their property. A powerful tactic to accelerate depreciation deductions is conducting a cost segregation study, which breaks down the property into smaller components that depreciate more quickly – leading to larger deductions faster. While this tax break can be valuable, it may increase an HNWI’s future tax liability when those deductions are recaptured upon sale. 

Like-kind (1031) exchange

To defer capital gains taxes when selling real property, HNWIs can use a like-kind exchange to reinvest the proceeds from the sale into another like-kind property. This strategy allows investors to postpone paying income tax on the sale and keep more capital invested in real estate. 

Like-kind exchanges can only be used when exchanging real property. This means that despite the IRS classifying cryptocurrencies as property, gains on appreciated crypto cannot be deferred with a 1031 exchange under current tax law.

Confused about crypto taxes? Consider CoinTracker Full Service 

As digital assets become a more accepted and accessible investment class, more HNWIs are finding the need for a solid crypto tax strategy. Reporting cryptocurrencies like Bitcoin (BTC) isn’t the same as with traditional assets, but that doesn’t mean the IRS takes them any less seriously. 

For expert assistance with compiling and filing crypto taxes, consider CoinTracker Full Service. This personalized concierge service monitors all your crypto-related activity and provides quarterly health reports to help you stay on track.

Explore how CoinTracker Full Service can optimize crypto tax reporting so your digital assets work for you – not against you – come tax time.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.