No investor enjoys seeing an investment decline in value. But in a taxable investment account, losses may create a planning opportunity.
Tax-loss harvesting is the process of selling an investment for less than you paid for it and using that realized capital loss to offset capital gains. While this strategy does not eliminate the loss itself, it may help reduce current or future tax liability.
At True North Wealth Management, we help clients think beyond investment performance alone. A strong portfolio strategy should also consider tax efficiency, income needs, risk tolerance, and long-term goals.
How Tax-Loss Harvesting Works
A capital loss occurs when you sell an investment for less than your cost basis. A capital gain occurs when you sell an investment for more than your cost basis.
Tax-loss harvesting allows you to use realized capital losses to offset realized capital gains. If your losses exceed your gains, you may generally use up to $3,000 of net capital losses to offset other income on your federal tax return each year. Any remaining losses may generally be carried forward to future tax years. The IRS explains that excess capital losses can be carried over and treated as if they occurred in the following year.
For example, if you realized $20,000 in capital gains and also harvested $12,000 in capital losses, those losses may help reduce your net taxable capital gain to $8,000 before considering other tax factors.
Why Investors Use Tax-Loss Harvesting
Tax-loss harvesting may help investors:
Offset capital gains from portfolio sales
Reduce taxable income within annual limits
Carry unused losses into future tax years
Improve after-tax portfolio results
Rebalance a portfolio more tax-efficiently
Replace underperforming holdings with better-fit investments
This strategy can be especially useful in years when markets are volatile, when a portfolio has concentrated gains, or when an investor needs to sell appreciated assets.
Tax-Loss Harvesting Works Only in Taxable Accounts
Tax-loss harvesting applies to taxable investment accounts, such as individual, joint, or trust brokerage accounts.
It generally does not apply inside tax-advantaged accounts such as:
Traditional IRAs
Roth IRAs
401(k)s
403(b)s
SEP IRAs
SIMPLE IRAs
Health savings accounts
Because gains and losses inside tax-advantaged retirement accounts are treated differently, selling an investment at a loss inside those accounts does not create the same taxable capital loss.
Watch the Wash-Sale Rule
The IRS wash-sale rule can prevent you from claiming a tax loss if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale. IRS materials describe a wash sale as a sale of securities at a loss followed by the acquisition of the same or substantially identical securities within 30 days before or after the sale date.
This creates a 61-day window: 30 days before the sale, the sale date itself, and 30 days after the sale.
For example, if you sell a stock at a loss and buy it back a week later, the loss may be disallowed for current tax purposes. The same issue may arise if you purchase the replacement shares shortly before selling the original shares.
The rule can also apply when you buy a substantially identical investment in another account, including certain retirement accounts. Because the details can become complicated, investors should review trades carefully before harvesting losses.
You Can Stay Invested Without Violating the Rule
Tax-loss harvesting does not necessarily mean leaving the market.
In some cases, an investor may sell one investment at a loss and purchase a different, non-identical investment that keeps the portfolio aligned with its target allocation. This may help maintain market exposure while avoiding the wash-sale rule.
However, the replacement investment should be reviewed carefully. It should support the overall investment strategy and should not be “substantially identical” to the security sold.
Potential Drawbacks of Tax-Loss Harvesting
Tax-loss harvesting can be useful, but it is not always the right move.
Before selling an investment for a tax loss, consider:
Whether the investment still fits your long-term strategy
Whether transaction costs or spreads may reduce the benefit
Whether the replacement investment changes your risk exposure
Whether the wash-sale rule may disallow the loss
Whether harvesting the loss may increase future capital gains
Whether the tax benefit is meaningful enough to justify the trade
A tax decision should not override sound investment judgment.
Think Year-Round, Not Just at Year-End
Many investors think about tax-loss harvesting in December, but opportunities can appear throughout the year.
Market volatility, portfolio rebalancing, concentrated stock sales, mutual fund capital gain distributions, and changes in tax circumstances may all create reasons to review tax-loss harvesting earlier.
A year-round approach can help investors make more thoughtful decisions instead of rushing near year-end deadlines.
Tax-Aware Investing Requires Coordination
Tax-loss harvesting works best when your investment strategy and tax strategy work together.
That may involve coordinating with your CPA or tax professional to understand:
Expected capital gains
Short-term versus long-term gains
Current-year income
Carryforward losses
Charitable giving plans
Roth conversion strategy
State tax treatment
Estimated tax payments
Portfolio rebalancing needs
At True North Wealth Management, we help clients integrate tax-aware investment management with retirement planning, income planning, estate planning, and long-term wealth strategy.
Use Losses Strategically
Investment losses are never the goal. But when losses occur in a taxable account, they may create an opportunity to improve after-tax outcomes.
If you have taxable investments, realized gains, concentrated holdings, or questions about how tax-loss harvesting may fit your plan, schedule a conversation with True North Wealth Management.
A thoughtful review can help you understand your options, avoid wash-sale mistakes, and build a more tax-aware investment strategy.
Important Disclosures:
This material is for informational purposes only and is not intended as tax, legal, accounting, or individualized investment advice. Tax-loss harvesting may not be appropriate for every investor. Tax laws, capital loss rules, wash-sale rules, and state tax treatment may change. Investment returns and principal values fluctuate with market conditions, and investments may be worth more or less than their original cost when sold. Please consult qualified tax, legal, and financial professionals before implementing any tax strategy.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite and customized by True North Wealth Management LLC to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.