Tax-Loss Harvesting: How to Offset Capital Gains & Reduce Your Tax Bill

Picture this: You’re hiking up a mountain, and you pick up a heavy rock along the way. Instead of carrying the weight unnecessarily, you drop it to make your journey easier. That’s exactly what tax-loss harvesting does for your investment portfolio—it helps you shed taxable losses to lighten your tax burden.

If you’re investing in stocks, crypto, or other taxable assets, tax-loss harvesting can save you thousands by reducing the taxes owed on your gains. But how does it work, and when should you use it? Let’s break it down.

1. What Is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy where you sell losing investments to offset capital gains taxes on winning investments. The IRS allows you to use these losses to reduce taxable income up to a certain limit.

✅ Key Benefits:

• Lowers capital gains tax liability

• Can offset up to $3,000 of ordinary income per year

• Frees up cash for reinvesting in better-performing assets

📌 Example: You made a $10,000 profit on Apple stock but lost $5,000 on Tesla. By selling the Tesla shares, your taxable gain is now $5,000 instead of $10,000, reducing your tax bill.

2. How Capital Gains Taxes Work

Before diving deeper, let’s review capital gains tax rules:

Type of Gain	Holding Period	Tax Rate
Short-Term Capital Gains	Less than 1 year	Taxed as ordinary income (10%-37%)
Long-Term Capital Gains	1 year or more	0%, 15%, or 20% based on income

📌 Pro Tip: Tax-loss harvesting is most valuable for short-term capital gains, since these are taxed at higher rates.

3. The Tax-Loss Harvesting Process (Step-by-Step)

Step 1: Identify Losing Investments

Review your portfolio for assets with unrealized losses (stocks, ETFs, crypto, mutual funds, etc.).

Step 2: Sell Losing Investments to Lock in Losses

Execute the sale of losing assets to create a realized loss (paper losses don’t count!).

Step 3: Use Losses to Offset Gains

Apply your losses to: ✅ Offset capital gains dollar-for-dollar ✅ Deduct up to $3,000 from ordinary income if losses exceed gains ✅ Carry over excess losses to future tax years

Step 4: Reinvest While Avoiding the Wash Sale Rule

The IRS Wash Sale Rule prevents you from claiming a tax loss if you repurchase the same (or substantially identical) security within 30 days before or after selling.

✅ Solution: Buy a similar (but not identical) investment to stay in the market.

📌 Example: You sell SPY (S&P 500 ETF) at a loss, then immediately buy VTI (Total Market ETF) to maintain exposure without violating the Wash Sale Rule.

4. When Should You Use Tax-Loss Harvesting?

✅ You have large capital gains this year – Offset gains to lower your tax bill.✅ You’re in a high tax bracket – Reducing taxable income is more valuable.✅ You want to rebalance your portfolio – Sell poor-performing assets and reinvest in stronger ones.✅ You expect a lower tax rate next year – Offset gains now while you’re in a high bracket.

📌 Avoid it if: You don’t have taxable investments (this only applies to non-retirement accounts!).

5. Common Tax-Loss Harvesting Mistakes

🚫 Repurchasing the same investment too soon (Wash Sale Rule violation).🚫 Selling investments just for tax benefits (Don’t let taxes dictate your investment strategy).🚫 Forgetting to carry over losses (Unused losses roll forward to future years—don’t waste them!).🚫 Ignoring state taxes (Some states don’t allow tax-loss harvesting benefits—check your state rules!).

6. Can Tax-Loss Harvesting Be Automated?

Yes! Some investment platforms offer automated tax-loss harvesting, including:

• Wealthfront

• Betterment

• Personal Capital

These robo-advisors scan portfolios and execute tax-loss harvesting strategies automatically.

📌 Manual vs. Automated: If you trade actively, you may prefer to manage it yourself. If not, automation can maximize efficiency and keep you compliant with tax rules.

Final Thoughts: Is Tax-Loss Harvesting Right for You?

Tax-loss harvesting is a powerful, legal way to reduce taxable gains, lower income taxes, and improve portfolio efficiency. If you have taxable investments, this strategy can save you thousands over time.

If you’re meticulous, you can handle this yourself. But if you’d rather focus on growing your wealth while someone else handles the tax savings, I can help—https://www.glavinicfs.com/bookandrew.