What Is Tax-Loss Harvesting?

Tax-loss harvesting is the practice of selling securities that are worth less than what you originally paid for them. These realized losses can then be used to:

• Offset taxable gains from other profitable investments.
• Reduce your taxable income by up to $3,000 per year if losses exceed gains.
• Carry forward unused losses indefinitely to offset future gains.
• Rebalance your portfolio into stronger-performing assets without a major tax hit.

By paying less to Uncle Sam today, you keep more of your wealth working for you in the markets, which can compound into meaningful long-term benefits.

When Does It Make Sense?

Tax-loss harvesting can be beneficial in both up and down markets. It is especially useful:

• After a market correction (a decline of 10% or more from a recent high).
• When a particular stock or fund underperforms your expectations.
• During years when you realize significant gains and want to soften the tax impact.

Remember, this strategy only applies to taxable investment accounts—not retirement accounts like IRAs or 401(k)s, since losses in tax-deferred accounts are not deductible.

Understanding Capital Gains and Losses

The IRS allows investors to balance capital gains against capital losses each year. Here’s what you need to know:

Short-Term vs. Long-Term Capital Gains

• Short-term capital gains (investments held less than one year) are taxed at your ordinary income tax rate.
• Long-term capital gains (investments held more than one year) are taxed at preferential rates, which are typically lower than ordinary income rates.

If your net losses exceed $3,000 in one year, you can carry the remainder forward indefinitely, giving you a future “tax-deduction piggy bank.”

The Wash-Sale Rule: Avoiding a Costly Mistake

If you sell a losing investment but still want exposure to it, you must be careful not to trigger a wash sale.

A wash sale occurs if you buy a “substantially identical” security within 30 days before or after the sale date. If this happens, your loss is disallowed for that tax year and instead added to the cost basis of the new security—delaying the benefit.

A common strategy is to replace the investment with a similar, but not identical, asset (for example, a different ETF in the same sector). This allows you to maintain market exposure while still capturing the tax benefit.

Why Affluent Investors Should Consider Tax-Loss Harvesting

For high-net-worth households, investment gains and taxable income can create significant annual tax obligations. Tax-loss harvesting offers a way to:

• Improve after-tax portfolio returns.
• Create more flexibility for rebalancing and diversification.
• Take advantage of volatility and dispersion within markets—since even in years when the S&P 500 posts gains, many individual stocks still finish negative.

Tax-Loss Harvesting in All Market Environments

Whether markets are booming or in decline, opportunities exist. In strong years, harvesting can offset gains you’ve realized; in weaker years, it can help reduce taxable income and build a forward-looking deduction bank.

Note the purpose of tax-loss harvesting is not to pick losing stocks. It is simply to help investors benefit from naturally occurring market fluctuations. Think of it as turning market volatility into an ally rather than a threat.

Final Thoughts: Strategy With Purpose

While tax-loss harvesting can be powerful, it should never replace a sound, long-term investment plan. The primary goal is to stay aligned with your broader financial objectives. Tax savings are important, but they come second to ensuring your wealth is structured to meet your family’s goals.

Because tax rules are complex, and mistakes like triggering a wash sale can cost you, it’s wise to work with a wealth advisor to tailor this strategy to your situation.