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. It may reduce current-year tax when the loss is realized in a taxable account, remains deductible after the wash-sale rules, and offsets gains subject to the taxpayer’s applicable rates.
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.
Hypothetical example: if you have $80,000 of realized long-term capital gains and realize a deductible $30,000 capital loss, the net gain would fall to $50,000. If that $30,000 actually offsets gains subject to a 20% federal long-term capital-gains rate plus the 3.8% net investment income tax, the estimated federal tax difference is $7,140 ($30,000 × 23.8%). Actual results vary with holding period, applicable rates, NIIT exposure, state tax, loss limitations, account type, and the wash-sale rules.
A wash sale can disallow a stock or securities loss when substantially identical stock or securities are acquired within 30 days before or after the loss sale. The rule can also involve a spouse, a controlled corporation, or an IRA. Review the full 61-day window and account-level facts rather than relying on a simple 30-day waiting slogan.
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 in a taxable account. For a regular-way sale of securities traded on an established market, IRS Publication 550 generally uses the trade date—not the later settlement date—to determine the tax year. Short sales and other assets can follow different rules, so confirm the transaction type and year-end cutoff.
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).
Replacement investments require care: A different ticker or provider is not automatically a safe harbor under the substantially-identical standard. Compare holdings, index methodology, rights, and exposure with a qualified tax professional before trading.
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%.
The value of harvesting depends on gains actually offset, applicable rates, holding periods, and future transactions. A simplified example: if a $30,000 realized loss offsets gains taxed at an assumed 23.8% federal rate, the potential current federal tax reduction is $7,140. Results vary, and a harvested loss may defer tax rather than eliminate it.
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
Quick answers
It is the sale of an investment at a loss to offset capital gains. The strategy applies to taxable-account transactions and must be coordinated with wash-sale and other loss-limitation rules.
Realized capital losses first offset capital gains under the tax netting rules. If total losses exceed gains, a limited amount may offset ordinary income and unused losses may carry forward.
A loss on stock or securities may be disallowed when substantially identical stock or securities are acquired within 30 days before or after the loss sale.
After netting capital gains and losses, an individual may generally deduct up to $3,000 of excess net capital loss against ordinary income each year, or $1,500 if married filing separately.
Generally yes. Unused net capital losses may carry to later tax years until used, while retaining their short-term or long-term character.
Yes, a deductible realized capital loss can offset capital gains under the ordering rules. The tax effect depends on the type of gain, rates, account, and the taxpayer’s facts.
Primary sources: IRS Publication 550 · IRS Topic 409 · Capital-gains tax planning · Tax planning services
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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.