Tax-Loss Harvesting: A Simple Guide to Reduce Taxes and Improve Your Investment Strategy
As 2025 comes to a close, many investors start thinking about taxes, and tax-loss harvesting is one of the most effective, legal ways to reduce your tax bill while keeping your investment strategy on track.
At Virgil Wealth, we help clients use tax-loss harvesting thoughtfully as part of a broader financial plan. In this guide, we’ll explain exactly how it works, when to use it, and mistakes to avoid.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is the process of selling investments at a loss to offset gains elsewhere in your portfolio.
You’re not trying to time the market.
You’re simply using the tax code to your advantage.
When you sell an investment below your purchase price, the loss can be used to:
Offset capital gains (short-term or long-term)
Reduce up to $3,000 in ordinary income per year
Carry forward unused losses into future years
In other words: you’re turning market declines into tax savings.
How Tax-Loss Harvesting Works (Simple Example)
For example:
You bought an ETF for $50,000
Today, it’s worth $40,000
If you sell it, you realize a $10,000 capital loss.
That loss can be used to:
Offset gains from selling another investment at a gain
Reduce your taxable income (up to certain limits)
Carry forward unused amounts to future years
If you want to stay invested, you simply reinvest the money into a similar—but not identical—investment so your portfolio remains aligned with your strategy.
The Wash-Sale Rule (Critical to Understand)
You can't sell an investment at a loss and rebuy “substantially identical securities” within 30 days before or after the sale.
If you do, the IRS disallows the loss for tax purposes.
Examples of wash-sale violations:
Selling one S&P 500 index fund and buying a different S&P 500 index fund
Selling a specific stock (like Apple) and buying it back within 30 days
Automatically reinvesting dividends into the same investment you sold
Ways to avoid wash-sale issues:
Turn off automatic dividend reinvestment temporarily
Use a different fund category (e.g., S&P 500 fund → total stock market fund)
Wait 31 days before repurchasing the same security
Financial advisors can help automate this correctly.
Good Candidates for Tax-Loss Harvesting
Tax-loss harvesting works best when:
Markets are down
Specific investments lag the broader market
You're rebalancing your portfolio anyway
You received large taxable gains earlier in the year
It is especially valuable for:
High-income earners
Taxable brokerage accounts
Investors planning major sales (property, business, concentrated stock)
Important: tax-loss harvesting does not apply in retirement accounts (401(k), IRA, Roth IRA).
Short-Term vs. Long-Term Capital Gains
Capital gains come in two types:
Short-term: Held less than 1 year (taxed at ordinary income rates)
Long-term: Held longer than 1 year (lower tax rates)
When you harvest losses, the IRS applies them in this order:
Offset short-term gains
Offset long-term gains
Reduce ordinary income (up to $3,000 per year)
Carry forward losses indefinitely
Offsetting short-term gains is typically the most valuable use of losses.
Common Mistakes to Avoid
1. Triggering wash sales
Rebuying too soon can erase deductions.
2. Selling investments in retirement accounts
Losses in tax-advantaged accounts are not deductible.
3. Holding cash and missing a rebound
Replace with a similar investment immediately to stay invested.
4. Harvesting without a plan
Random selling can cause portfolio drift.
Tax-Loss Harvesting + Long-Term Strategy
Tax-loss harvesting is not market timing; it is portfolio maintenance plus tax efficiency.
When done correctly, it can:
Improve after-tax returns
Reduce volatility
Keep asset allocation on target
Turn downturns into strategic opportunities
It is especially powerful when combined with:
Rebalancing
Roth conversions
Capital gains planning
Diversification strategies
At Virgil Wealth, we evaluate tax opportunities year-round, not just in December.
Conclusion + Call to Action
Market declines are not pleasant, but they can be productive. Tax-loss harvesting helps you take advantage of volatility, reduce taxes, and strengthen your long-term financial plan.
If you’d like a second set of eyes on your portfolio, we’re here to help.