If you’re looking at your portfolio right now (April 2025) and seeing more red than green, you’re not alone. Volatility is up, headlines are loud, and even the strongest investors are feeling the pressure.
But here’s the upside: this kind of market is ripe with opportunity—if you know how to use it.
One of the most overlooked yet powerful tools in a downturn is tax loss harvesting. If you’re a high-income professional, especially one with concentrated stock or equity compensation, now is the time to pay attention. In this article, we’ll walk you through exactly what tax loss harvesting is, how to execute it correctly, and why this strategy could save you thousands in taxes—both now and in the future.
What Is Tax Loss Harvesting (And Why It Matters Right Now)?
At its core, tax loss harvesting is a way to use your investment losses to offset taxable gains—reducing the amount you owe in capital gains taxes.
Here’s how it works:
- You sell an investment that has declined in value, realizing a capital loss.
- That loss can be used to offset capital gains from other investments.
- If your losses exceed your gains, you can deduct up to $3,000 per year against ordinary income—and carry forward unused losses indefinitely.
In a market like this, where even great companies are temporarily down, that strategy becomes gold.
This isn’t just a way to “make the best of a bad situation.” It’s a proactive, intelligent tax strategy—especially for those with equity compensation, RSUs, ESPPs, or recent liquidity events.
Common Misconception: “I’m long-term. I’ll just hold.”
That mindset makes sense—but you can be a long-term investor and use smart tax strategies along the way. The key is to stay invested while seeking to optimize your position—not abandoning your plan.
How to Execute Tax Loss Harvesting (Without Breaking the Rules)
While the concept is simple, the execution requires precision. The biggest mistake? Wash sale rules.
Here’s what you need to know:
Step-by-Step Guide to Tax Loss Harvesting:
- Identify positions in your taxable brokerage account that are trading below their cost basis.
- Sell those positions to lock in the loss.
- Reinvest the proceeds in a similar—but not “substantially identical”—investment to maintain market exposure.
- Document everything. Losses must be recorded correctly for tax purposes.
The Wash Sale Rule:
If you sell a security at a loss and then buy the same or substantially identical security within 30 days before or after the sale, your loss is disallowed. It gets added to the cost basis of the new security—so it’s not gone forever, but it can’t be used now.
This rule applies across all accounts—including IRAs and even a spouse’s account—so coordination is key.
Pro Tip:
Use ETFs in the same sector to stay invested without triggering wash sales. For example, sell a tech-focused mutual fund and buy a tech ETF instead.
When It Works Best—and for Whom
Tax loss harvesting isn’t for everyone. But if you’re a high-income earner, tech professional with equity compensation, or investor with significant taxable assets—it’s a no-brainer.
It’s most valuable when:
- You’ve had a recent liquidity event (like selling company stock or a business)
- You have RSUs or ESPPs and are facing concentrated gains
- You’re in a high tax bracket and want to offset future gains
- You’re planning a major asset sale in the next few years (e.g., real estate)
When to Skip It:
- If all your assets are in tax-advantaged accounts (like IRAs or 401(k)s)
- If your unrealized losses are minimal or already covered by carried-forward losses
Alternative Approaches & Strategic Variations
There are multiple ways to approach tax loss harvesting depending on your situation:
Tactical vs. Systematic Harvesting:
- Tactical: Manually review and sell underperformers during a downturn
- Systematic: Automate harvesting through software or a manager who scans your portfolio regularly
Mutual Funds vs. ETFs:
- ETFs offer more flexibility in finding near-identical replacements that don’t trigger wash sales
- Mutual funds may limit your options or have trade restrictions
Active vs. Passive Accounts:
- If you manage your own portfolio, be extra cautious with wash sales and timing
- With an advisor, you gain access to deeper tools and coordination across accounts
FAQs
What is tax loss harvesting?
Tax loss harvesting is the practice of selling investments that have declined in value to offset capital gains and reduce your tax liability.
How much can I deduct from tax loss harvesting?
You can deduct losses up to the amount of your capital gains. If you have more losses than gains, you can deduct up to $3,000 against ordinary income and carry the rest forward.
What is the wash sale rule?
If you buy a “substantially identical” security within 30 days before or after selling it at a loss, the IRS disallows the loss for tax purposes.
Does tax loss harvesting work for RSUs and ESPPs?
Not directly, but it can be used to offset gains realized from exercising or selling RSUs/ESPPs in taxable accounts.
Can I tax loss harvest in my IRA or 401(k)?
No. Tax loss harvesting only applies to taxable brokerage accounts—not tax-advantaged retirement accounts.
Final Thoughts: Don’t Let a Down Market Go to Waste
Market volatility feels uncomfortable—but it creates real opportunities for those who know how to respond.
Tax loss harvesting is one of the most effective ways to reduce your tax bill, free up capital, and stay fully invested without changing your overall strategy. It’s a smart move, not a reactive one—and when executed properly, it can deliver meaningful long-term value.
If you’re unsure whether this strategy makes sense for you, or how to execute it without triggering wash sale rules or tax complications, we’re here to help.
Start by taking our Wealth Archetype Quiz to understand how your financial personality shapes your investment decisions—or reach out to explore a Financial Alignment™ session where we can build a tax-smart, values-driven strategy that fits you.
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