When you have realized capital gains, you owe capital gains taxes. Investors, therefore, seek to offset realized capital gains in order to reduce the capital gains taxes they owe the IRS.

There are a number of ways to offset realized capital gains, thus reducing the amount of capital gains tax due to the IRS. Generally, the first thing to do to offset realized capital gains is to use capital losses to offset the capital gains.

Way to offset capital gains 1: Short-Against-the-Box

This method of offsetting capital gains is used when the capital gains is realized by selling stocks. Short-against-the-box is independently selling a stock short, when you hold the same or substantially identical securities long in your account. Unless a taxpayer follows the instructions carefully, a short-against-the-box transaction of an appreciated stock position is treated as an immediate taxable transaction (known as a "constructive sale"). Thus a taxpayer entering into the transaction would have to recognize capital gains in the year of the initiation of the short-against-the-box transaction.

Way to offset capital gains 2: Retirement Plans

Funding deductible retirement plans serves to offset any income, including capital gains. This includes deductible IRAs (such as Traditional IRA and SEP IRA) and employer sponsored salary deferral plans such as 401k, 403b and SIMPLE IRA plans. For a self-employed individual or for a business owner operating a flow through business entity such as a partnership, S corporation or LLC, consideration can be given to setting up a retirement plan to offset income from capital gains.

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