Tax Loss Harvesting: Turning Market Losses into Long Term Gains

As a financial advisor, one of my top priorities is making sure my clients pay as little in taxes as legally possible.

One of the most effective ways to do that is through Tax Loss Harvesting (TLH), a strategy that can turn temporary market dips into permanent tax savings.

When done strategically, TLH helps you make volatility work for you, not against you.

What Is Tax Loss Harvesting?

Simply put, Tax Loss Harvesting is the practice of selling an investment that has lost value, then using that realized loss to offset realized investment gains. The result: you reduce the amount of your portfolio’s gains that are subject to taxes.

A Simple Example

Let’s say you own two investments:

  • Investment A: Bought for $1,000, now worth $750 → a $250 loss
  • Investment B: Bought for $1,000, now worth $1,250 → a $250 gain
If you sell both, the $250 loss offsets the $250 gain.
Tax owed on those transactions: $0.

This strategy can be especially valuable if you’re in a higher tax bracket or facing a large one-time gain, such as selling an investment property or a highly appreciated company stock.

Choosing the Right Investments for TLH

Not every investment type works equally well for Tax Loss Harvesting.

Here’s what matters most: flexibility and control.

  • ETFs (Exchange-Traded Funds) and individual stocks are ideal. They allow us to identify and sell specific lots, meaning we can target only the shares showing a loss.
  • Mutual funds, on the other hand, use an average cost basis, making it impossible to isolate “losing” shares. They also trade only once per day, which limits precision.

Advisor Insight:
A client once came to me holding mutual funds from a previous advisor. Because of the fund structure, we couldn’t strategically harvest losses. Every trade was a blunt instrument. That’s why, for taxable accounts, we typically prefer ETFs or individual stocks. They give us the control we need to fine-tune your tax strategy.

Takeaway: Choosing the right investment vehicle is the foundation of successful tax management.

Avoiding the Wash Sale Rule

The Wash Sale Rule is the IRS’s main guardrail, and one of the most common pitfalls for DIY investors.

If you buy the same (or a “substantially identical”) investment within 30 days before or after selling it for a loss, your harvested loss becomes disallowed.

That’s a 61-day window to watch carefully.

Three Key Things to Know:
    1. All Accounts Count:
      The rule applies across all household accounts, including IRAs, joint accounts, and even your spouse’s account.
    2. Brokers Don’t Cross-Check:
      Your custodian (Schwab, Fidelity, etc.) only tracks wash sales within its own system. If you sell at Schwab and buy at Vanguard, it’s on you (or your advisor) to track compliance.
    3. RSUs Can Trigger It:
      If your company stock vests during that 61-day period, it can count as a “buy,” unintentionally violating the rule.
    Our “Sell-and-Replace” Strategy

    Here’s how we manage TLH efficiently and stay compliant:

    • Sell the loss: We sell the investment that’s down (for example, an S&P 500 ETF).
    • Buy a similar, but not identical, fund: We reinvest immediately in something that tracks a similar market (like a Total U.S. Stock Market ETF).
    • Wait 31+ days: Once the window closes, we can switch back if desired.

    This keeps your portfolio fully invested while capturing the tax benefit.

    Beyond Stocks: Offsetting Real Estate Gains

    This is where things get exciting.

    Harvested investment losses can offset any capital gains...even those from real estate.

    Example:

    A client recently had a six-figure loss from a concentrated tech stock position. Around the same time, they sold an investment property with significant gains.

    By coordinating the two, the harvested stock losses offset the real estate gains entirely.

    Result: $0 capital gains tax owed.

    That’s proactive tax planning in action.

    When Does TLH Make Sense?

    Tax Loss Harvesting isn’t something we do constantly; it’s most effective when it aligns with your broader goals.

    It’s worth considering if:

    • You’re a high-income earner looking to reduce annual taxes.
    • You’ve had large capital gains from investments, stock sales, or property.
    • You’re living off portfolio withdrawals and want to manage taxable income year to year.
    The Bottom Line

    Market dips can feel discouraging, but with the right strategy, they can become valuable opportunities.

    Tax Loss Harvesting helps you:

    • Keep your portfolio aligned
    • Reduce your tax bill
    • Turn temporary losses into long-term financial wins