By Jake A. Castillo CFP®, AIF®, Associate Wealth Advisor
Tax loss harvesting is a straightforward process that can help save you money on capital gains taxes. So, what are the specific benefits and stipulations that tax loss harvesting offers? And how do you do it? In this article, we’ll break these down and talk about what tax loss harvesting could mean for you and your investment strategy.
Tax Loss Harvesting Basics
When you sell an investment at a loss – when the fair market value of an investment you sell is below your cost basis – the IRS permits you to apply that monetary loss against capital gains. Hence the term tax loss harvesting: You’re “harvesting” losses to use them to help reduce your taxes on capital gains.
Capital losses are defined as either short term or long term and can be used to offset both short- and long-term capital gains. “Short term” is defined by the IRS as assets held for one year or less. In terms of which types of losses can be applied against which type of gains, think of it as like applied against like first. Any short-term losses you have would first be applied against your short-term capital gains; the same goes for your long-term losses and gains.
Once a loss has been recognized for tax purposes, you can then, if you wish, use the proceeds of the sale of that investment to purchase a different investment that has a similar investment objective and role in your portfolio.
Although tax loss harvesting is often associated with capital gains in securities, you can also make use of it with tangible investment assets like real estate – but not personal property like your home or car.
Can You Tax Loss Harvest in an IRA?
No. Tax loss harvesting is not relevant for traditional IRAs or Roth IRAs. It’s limited to taxable assets, meaning assets held in brokerage accounts such as an individual account, joint accounts, trust accounts, and most corporate accounts.
Can You Tax Loss Harvest Crypto?
Yes. Generally, the same rules apply to crypto as they do to tax loss harvesting traditional securities. There is one nuance with crypto, specifically the wash sale rule does not apply to crypto. So, you can sell a cryptocurrency at a loss but then can rebuy the same currency after 24 hours. The losses from crypto can be used to help offset the gains from traditional securities as well.
How Does Tax Loss Harvesting Work?
Let’s break this down in a simple example:
Let’s say you purchased XYZ stock for $100 on March 1, 2026. Six months later you notice that your holding in XYZ stock has dropped to $50, and you decide to sell it. From the sale you would recognize a $50 short-term capital loss. From there you can then use the proceeds to reinvest the $50 in a stock or fund that represents a similar investment objective to the role XYZ played in your portfolio.
There is one caveat you should be aware of when deciding to perform tax loss harvesting: the IRS wash sale rule. This rule states that if you sell a security at a loss and you buy a security that is “identical” within 30 days before or after you sold the security – that loss will be disallowed for tax deduction purposes.
How Tax Loss Harvesting Helps Offset Capital Gains
Tax loss harvesting is a strategy that can be utilized to help offset capital gains taxes as well as, potentially, taxes on your ordinary income. As mentioned above, short-term capital losses are first used to offset short-term capital gains; long-term capital losses are first applied to offset long-term capital gains. But ultimately, if there are remaining losses, you can then apply your short-term losses against long-term gains and vice versa.
If there is a net loss at the end of the tax year, up to $3,000 can also be used against ordinary income. Finally, if you have net losses of more than $3,000, these can carry forward to future tax years.
Taking Advantage of Opportunities to Tax Loss Harvest
Tax loss harvesting is a strategy that can play an important role in your overall investment strategy. During times of volatility in the stock market, it may make sense to sell an appreciated security and recognize a capital gain – simultaneously recognizing a loss to help offset that tax liability – and re-invest the proceeds. This allows you to utilize the tax benefit of the loss in reducing the tax liability of the capital gain and reset your cost basis if you decide to reinvest the proceeds from the sale of the appreciated security. Again, you can repurchase the same security after 30 days to avoid the wash sale rule.
Tax loss harvesting can be a valuable tool and is a fundamental way to help manage your tax bill and protect your wealth. At Halbert Hargrove, we take a proactive approach throughout each year, looking for opportunities to tax loss harvest for our clients in an effort to benefit their overall tax picture. If you have any questions about this topic, Halbert Hargrove’s advisors are here to help guide you through potential tax saving strategies and liaise with your tax advisor to coordinate your tax planning, please reach out to us to get started.
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