The good news is that there are strategies available that may help reduce the taxes owed on your investments. One such strategy is tax‑loss harvesting, and for some investors, it can play a valuable role in improving overall tax efficiency. 

What Is Tax‑Loss Harvesting? 

Tax-loss harvesting is a tax efficient strategy that may help you minimize the amount of taxes you owe on your investments. This strategy helps you offset any capital gains with any capital losses taken throughout the year. Additionally, if your capital losses are greater than your capital gains, you can reduce your taxable income by up to $3,000 for the current year and any amount above that you can carry forward to future tax years. A component to help maximize this strategy is taking the money raised from the sale of your investments and reinvesting into the market to potentially increase your after-tax returns. 

A Simple Example of Tax‑Loss Harvesting 

Consider the following simplified scenario: 

• You realize a $40,000 capital loss in Investment A 

• You realize a $35,000 capital gain in Investment B 

The $40,000 loss can be used to fully offset the $35,000 gain, leaving $5,000 in remaining losses. Of that amount, $3,000 may be used to reduce current‑year ordinary taxable income. The remaining $2,000 may be carried forward to future years. 

While simplified, this example illustrates how tax‑loss harvesting may improve tax efficiency when used thoughtfully. 

Why Short‑Term vs. Long‑Term Gains Matter 

Another important consideration is the type of gains being offset. Short‑term capital gains, generated from investments held for one year or less, are taxed as ordinary income. Because of this, offsetting short‑term gains with losses may have a more meaningful impact on an investor’s tax bill. 

In more complex situations, working with a Wealth Manager can help ensure the strategy aligns with your broader financial picture. 

Important Rules to Understand Before Harvesting Losses 

Tax‑loss harvesting is subject to several important rules: 

1. Year‑End Deadline 
All tax‑loss harvesting transactions must be completed by December 31 to count toward the current tax year. 

2. Limits on Loss Usage 
Realized losses can offset an unlimited amount of capital gains. If losses exceed gains, up to $3,000 may be applied against ordinary income, with additional losses carried forward. 

3. The Wash‑Sale Rule 
The IRS wash‑sale rule prohibits selling an investment at a loss and purchasing the same or a substantially identical investment within 30 days before or after the sale. Violating this rule disallows the loss for tax purposes. This rule applies across all accounts you or your spouse control. 

4. State‑Specific Tax Considerations 
Tax‑loss harvesting rules may vary by state. Consulting a tax professional can help clarify how state laws apply to your situation. 

Final Thoughts on Tax‑Loss Harvesting 

Tax‑loss harvesting may be a useful strategy for reducing capital gains and ordinary income taxes, but it is not appropriate for every investor. The effectiveness of the strategy depends on your overall goals, portfolio structure, and tax situation. 

Understanding the rules and working with qualified professionals can help ensure tax‑loss harvesting is implemented thoughtfully and in alignment with your long‑term plan.  

If you have any questions about your portfolio, please reach out to our team here at Howe & Rusling and we would be more than happy to help.