What is tax loss harvesting?

Tax loss harvesting is the practice of selling investments in taxable accounts that are worth less than their purchase price to realize a capital loss, which can offset capital gains and potentially reduce taxable income.

How do I start tax loss harvesting?

Review taxable accounts for positions with unrealized losses, realize the loss by selling, avoid the wash sale rule by choosing a similar but not substantially identical replacement, reinvest to stay aligned with your strategy, and track losses for potential carryforwards.

How much of a net capital loss can I deduct this year?

If your losses exceed your gains, you can generally deduct up to $3,000 against ordinary income in the current year and carry forward remaining losses to future years, per IRS rules.

Should I do tax loss harvesting in an IRA or 401(k)?

No. Tax loss harvesting applies to taxable accounts; it is not applicable to tax-deferred accounts like IRAs or 401(k)s.

Where can I learn more about wash sales and capital loss deductions?

For official guidance, see IRS Publication 550 (Investment Income and Expenses). For an investor-friendly overview of wash sales, see Investor.gov.

Understanding Tax-Loss Harvesting

Q: What is the wash sale rule?

The wash sale rule prevents you from claiming a loss if you buy the same or a substantially identical investment within 30 days before or after selling the original security. See IRS Publication 550 for details.

[Blog] How to Get Started with Tax Loss Harvesting_1200x800 | The Retirement Planning Group

Markets rise and fall. When they’re down, it can be discouraging to see red in your portfolio, but it can also create an opportunity for a smart tax move: tax loss harvesting.

If you’ve read our Tax Loss Harvesting Explained, you already know what the strategy is and how it works.

This blog focuses on how to do tax loss harvesting; the practical steps you can take to apply it in your own investment plan.

Step 1: Spot Investments with Losses

Start by reviewing your taxable investment accounts (not IRAs or 401(k)s). Identify any holdings currently worth less than what you paid for them.

You can use your account’s gain/loss report, or ask your Wealth Manager to pull one for you. Focus on losses that are large enough to offset gains or income in a meaningful way.

💡Related resource: Importance of Portfolio Monitoring

Step 2: Realize the Loss by Selling

To harvest a loss, you need to sell the investment; this locks in the loss for tax purposes.

If you’ve also sold investments with gains this year, the loss can offset those gains dollar-for-dollar.

If your losses exceed your gains, you can use up to $3,000 to reduce taxable income this year and carry forward any remaining loss to future years (based on IRS Publication 550: Investment Income Expenses).

Step 3: Avoid the Wash Sale Rule

The wash sale rule prevents you from claiming a loss if you buy the same, or a substantially identical, investment within 30 days before or after selling it.

To stay invested, consider buying a similar but not identical security. For example, if you sell a technology-focused ETF, you might buy another ETF with broader tech exposure.

🔗 Learn more about the IRS wash sale rule

Step 4: Reinvest Strategically

You don’t have to sit in cash. In fact, staying invested helps you benefit from potential market rebounds.

Choose replacement investments that align with your overall investment strategy and risk tolerance. Keep your portfolio’s asset allocation balanced with your long-term goals, and confirm any changes align with your broader plan.

Step 5: Track and Carry Forward

If your total losses are larger than what you can see this year, the IRS allows you to carry them forward to offset future gains.

Keep detailed records of realized losses so you and your tax professional can make the most of them later. Your Wealth Manager and Tax Team can help coordinate tracking and carryover usage.

Is Tax Loss Harvesting Right for You?

Tax loss harvesting works best as part of a coordinated investment and tax plan. It may be a good fit if you:

- Have taxable accounts with investments currently as a loss
- Expect to realize capital gains this year or soon
- Want to rebalance your portfolio without triggering a larger tax bill

Not sure if it’s the right move? Explore our Tax-Loss Harvesting Guide for worksheets and examples to help you decide.

The Bottom Line

Losses are never enjoyable, but they don’t have to go to waste. With thoughtful planning, tax loss harvesting can help reduce your tax bill and keep your portfolio aligned with your goals.

If you’d like help reviewing your accounts for tax loss opportunities, schedule a quick call with our team. We’ll walk through your options together and help you take the next step confidently.

How to Get Started with Tax Loss Harvesting