Tax-loss harvesting lets you turn underperforming investments into a tax advantage — offsetting capital gains and reducing your bill for the year. When done correctly, it saves high-income investors and business owners thousands annually. Michelet Financial integrates this strategy nationwide.
Quick Answer — What Is Tax-Loss Harvesting?
Tax-loss harvesting is the strategy of selling investments at a loss to offset capital gains — reducing your tax bill for the year. When done correctly alongside wash-sale rules, tax-loss harvesting can save high-income investors and business owners thousands annually. Michelet Financial integrates tax-loss harvesting into a broader annual tax strategy.
The Fundamentals
Tax-loss harvesting is the intentional sale of an investment that has declined in value — not because you have given up on it, but to realize the loss for tax purposes. The realized loss then offsets capital gains from other investments, reducing your net taxable gain for the year.
The core mechanism: if you have $80,000 in realized capital gains and you sell an underperforming position for a $30,000 loss, your taxable capital gain drops to $50,000. At the 20% long-term federal rate plus 3.8% NIIT, that’s approximately $11,400 in tax eliminated from a single trade.
Tax-loss harvesting does not require permanently exiting a position — it requires selling, booking the loss, and staying out of a “substantially identical” security for 30 days (the wash-sale rule) before repurchasing.
Step by Step
Review your investment portfolio for positions with unrealized losses — securities currently worth less than you paid for them. Focus on positions with the largest losses relative to your capital gains exposure for the year.
Execute the sale to realize the loss. The sale must be completed and settled before December 31 for the loss to count in that tax year. Timing matters: losses in a non-retirement, taxable account only.
Realized losses offset capital gains of the same type first — short-term losses offset short-term gains, long-term losses offset long-term gains — then cross-apply. Net gains are what you owe tax on.
If your realized losses exceed your realized gains, up to $3,000 of the excess can reduce your ordinary income in the current year. The remaining excess carries forward to future tax years indefinitely.
After a 31-day waiting period (30 days + the day of sale), you may repurchase the original security if you still want the exposure. During the 30-day window, you can hold cash or a similar-but-not-identical replacement security to maintain market exposure.
Critical Compliance
You cannot claim a tax loss if you purchase a “substantially identical” security within 30 days before OR after the sale. That means 30 days before the sale, the day of the sale, and 30 days after — a 61-day total window. Violations disallow the current-year loss.
What counts as “substantially identical”: The exact same stock or security you sold. Options or warrants on the same security. Certain fund-to-fund swaps within the same family tracking the same index (a gray area the IRS is scrutinizing more closely).
What does NOT trigger wash-sale: A different ETF tracking the same general index from a different provider (e.g., selling one S&P 500 ETF and buying a different manager’s S&P 500 ETF). Stocks in the same sector but different companies. Bonds, preferred stock, or convertible securities not “substantially identical” to the sold security.
Important: A wash-sale violation does not permanently destroy the loss — the disallowed amount is added to the cost basis of the replacement security. But it eliminates the current-year tax benefit you were targeting, which is why compliance matters.
Beyond the Portfolio
Most tax-loss harvesting content focuses exclusively on investment portfolios. Business owners have additional levers that accomplish the same goal — realizing deductible losses to offset taxable income — through business operations.
When business equipment, vehicles, or other assets become obsolete, are damaged, or are no longer used in the business, disposing of or writing them off creates a deductible loss. This is the business equivalent of portfolio harvesting — realize the loss intentionally rather than waiting for natural retirement.
If inventory is damaged, obsolete, or has declined in market value below cost, you can write it down to fair market value and deduct the difference in the current year. A year-end inventory review should include identifying write-down candidates as part of your tax strategy.
When a business receivable becomes genuinely uncollectible — a client who will not pay, a loan that will not be repaid — and you have previously recognized that amount in income, you can deduct it as a bad debt. This directly reduces taxable income in the year the debt is deemed worthless.
Business owners with significant personal investment portfolios should be harvesting losses annually to offset capital gains from business sales, real estate transactions, or equity events. The two strategies complement each other — business gains met with portfolio losses, investment gains met with business write-offs.
Timing Strategy
The optimal time to harvest losses is before December 31 of the tax year in which you want the offset. Strategic investors monitor positions throughout the year, but the year-end window is when most harvesting decisions converge.
Note: If you harvest in late December and buy a replacement security, track your 30-day window — it runs into January of the following year.
High-Income Strategy
For investors earning $200,000+ (single) or $250,000+ (married filing jointly), the 3.8% Net Investment Income Tax (NIIT) applies to net investment income — which includes capital gains, dividends, and interest. This means the effective maximum federal rate on capital gains is not 20% but 23.8%.
Tax-loss harvesting is more valuable at higher income levels: each dollar of capital gain eliminated saves you 23.8 cents in federal tax, not just 15 cents. In high-tax states — California at 13.3% state income tax, New York at 10.9% — the combined marginal rate on capital gains can exceed 35%. At those rates, $100,000 in harvested losses saves more than $35,000.
Michelet Financial integrates tax-loss harvesting into a comprehensive annual tax strategy for high-income investors and business owners. The goal is not to harvest losses in isolation — it is to coordinate investment decisions, business income, and capital events so that every legal dollar of tax reduction is captured. Serving clients in all 50 states, fully virtual.
FAQ
Tax-loss harvesting is most effective when integrated with your full annual tax plan. Book a free consultation and let’s identify every dollar of offset available to you this year.
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IRS Topic 409: Capital Gains and Losses · IRS Publication 550
Tax-loss harvesting depends on the taxpayer’s holdings, tax lots, account activity, gains, losses, wash-sale exposure, state rules, and investment plan. Educational information only; not individualized legal, tax, investment, audit, or valuation-attestation advice. Updated August 21, 2026.