Your investment losses can help reduce taxes by offsetting gains or income. Even if you no longer have any gains, harvesting losses can be beneficial as they can be used to offset future income or profits. In this blog, you will learn about the good side of your investment. This will help create a positive balance in your portfolio.

Are you ready? Information in your hands is power. At H&CO, our individual tax services address a series of comprehensive strategies adaptable to each person and situation.

Read: Income Tax Planning for Individuals

What Is Tax-Loss Harvesting Exactly?

Tax-loss harvesting involves selling investments that have dropped in value to offset capital gains taxes on other investments that have appreciated.

You can claim a maximum loss that equals your realized gains plus an additional $3,000. This means your losses not only offset your gains but can also reduce your taxable ordinary income by up to $3,000. Take advantage of this strategy to enhance your tax efficiency and manage your investments effectively.

You may already take advantage of tax-loss harvesting if you have a financial advisor. If you're managing your investments on your own, it’s a good idea to consult a tax professional. At H&CO, we specialize in tax planning for individuals to ensure compliance with IRS regulations.

How tax loss harvesting helps you manage your taxes

An investment loss can be utilized in two main ways:

1. Losses can offset any investment gains.
2. Any remaining losses can be used to reduce up to $3,000 of other income on a tax return in a single year. (The deduction limit is $1,500 for married individuals filing separately.)

Additionally, any unused losses can be carried forward indefinitely to future tax years.

Capital gains and losses

The key difference between short-term and long-term gains is the rate at which they are taxed. Short-term capital gains are taxed as ordinary income at your marginal tax rate. The highest marginal federal tax rate on ordinary income is 37%. (The Internal Revenue Service [IRS] website provides the updated marginal income tax brackets.)

For individuals subject to the net investment income tax (NIIT) of 3.8%, the effective tax rate can reach as high as 40.8%. When you factor in state and local income taxes, the overall rates can be even higher.

In contrast, long-term capital gains are taxed at a lower capital gains tax rate, which can result in significantly reduced taxes.

Long-Term Capital Gains Rates by Filing Status and Income 2025

For high earners, the long-term capital gains tax rate can reach 23.8% when the 3.8% NIIT is applied. Adding state and local taxes may further increase this rate.

To offset capital gains, you can sell investments at a loss. This can help lower your taxable income. If you have net capital losses in one tax year, you can also use them in future years.

Harvest losses to help enhance your tax savings

When searching for candidates for tax loss selling, look for investments that no longer fit your goals. Consider those with weak future growth potential. Also, think about investments that can be easily replaced by others in your portfolio.

But beware! The IRS prohibits selling an investment at a loss and then immediately repurchasing it — a practice known as a “wash sale” — if you intend to claim the loss on your taxes.

Suppose you repurchase the same investment or any investment the IRS considers a substantially identical security within 30 days before or after the sale at a loss. In that case, you will not be able to claim that loss.

To effectively use tax-loss harvesting as a strategy, you need to identify specific batches of stock to sell. Since your investment company reports gains and losses on covered securities to the IRS, everyone involved must be aware of which stocks are being sold.

This requires you to utilize the "specific identification" cost basis method when selling stocks. Although this approach may involve more effort on your part, it offers greater flexibility in offsetting taxes.

To truly maximize the benefits of tax-loss harvesting, you must integrate it into your year-round tax planning and investment strategy.

Tax-Loss Harvesting Step-by-Step

1. Review Your Portfolio: Regularly assess your investments to identify positions with unrealized losses.
2. Calculate Potential Tax Savings: Estimate the tax impact of realizing losses against your capital gains and ordinary income.
3. Sell Losing Positions: Execute trades to realize losses considering your overall investment strategy.
4. Reinvest the Proceeds: Ensure you don't repurchase the same or substantially identical security within 30 days before or after the sale.
5. Observe the wash sale rule: Ensure you don't repurchase the same or substantially identical security within 30 days before or after the sale.
6. Keep good records: Document all transactions, including purchase dates, sale dates, and cost-basis information.
7. Report the losses on your tax return: Properly report realized gains and losses on your annual tax return, including Form 8949 and Schedule D.
8. Carry forward your excess losses: Carry them forward to future tax years if your losses are over the annual limit.
9. Consult professionals: Work with a financial advisor or tax professional to optimize your tax-loss harvesting strategy.
10. Review and adjust: Regularly reassess your strategy in light of changes in your finances, tax laws, and market conditions.

Are retirement accounts eligible for tax-loss harvesting?

No, you cannot incur a taxable gain in a retirement account, so there's no need to harvest losses. Be careful. If you sell an investment in a taxable account and then buy it back in your retirement account, you could trigger "the wash-sale rule".

Is tax-loss harvesting only beneficial for high-net-worth individuals?

Many taxpayers with short-term capital gains can reduce their tax bills by using tax-loss harvesting. Those in the highest tax brackets may benefit the most. This strategy offsets taxable investment gains by selling underperforming assets, thereby reducing tax liability and increasing long-term portfolio returns.

How we can assist you

At H&CO, we help you find capital losses. We review your portfolio to spot underperforming assets.

Our goal is to align this process with your financial goals. We want to help you reduce your tax burden while following all the rules. Contact our CPA team to help you plan and prepare your U.S. taxes.