The Ultimate Guide to Tax Loss Harvesting

In this article, we’ll explore…

• Tax Loss Harvesting Fundamentals: How selling securities at a loss to offset gains can reduce tax liability, boost after-tax returns, and maintain portfolio objectives through strategic reinvestment.
• Key Benefits and Application: Year-round opportunities to preserve capital, improve compounding, and create flexibility for rebalancing—especially in volatile markets.
• Risks and Compliance Considerations: Navigating the wash-sale rule, transaction costs, market risk, and tax-rate changes to ensure the strategy delivers its intended value.
• Enhancing Results with Active Management: How high active share, momentum-driven portfolios can expand tax-loss opportunities while adding diversification and potential outperformance.

Investing is about numbers, not guesswork. At its core, successful wealth management seeks to maximize returns while minimizing risks and costs—including taxes. One powerful tool to achieve this is tax loss harvesting, a strategy that can enhance after-tax returns without altering your portfolio’s overall investment strategy. In this guide, we’ll demystify tax loss harvesting, explore its benefits and risks, and equip you with the knowledge to make informed decisions for your financial future.

WHAT IS TAX LOSS HARVESTING?

Tax loss harvesting is the practice of selling securities at a loss to offset taxable gains elsewhere in your portfolio. By strategically realizing losses, investors can reduce their tax liability, freeing up capital to reinvest and compound over time. The harvested losses can offset capital gains or, in some cases, ordinary income, providing a tangible financial benefit [1].

How It Works:

• Identify Losses: Review your portfolio to find securities trading below their purchase price (cost basis).
• Sell the Security: Realize the loss by selling the underperforming security.
• Offset Gains: Use the realized loss to offset capital gains from other investments, reducing your taxable income.
• Reinvest: Reinvest the proceeds into a similar (but not identical) security to maintain your portfolio’s asset allocation and market exposure.
• Mind the Wash-Sale Rule: Avoid repurchasing the same or a “substantially identical” security within 30 days, as this could disallow the tax loss under IRS rules [2].

For example, if you sell a stock for a $5,000 loss and have a $5,000 capital gain from another investment, the loss can offset the gain, potentially eliminating the tax on that gain. If losses exceed gains, up to $3,000 of net losses can offset ordinary income annually, with excess losses carried forward to future years [1].

BENEFITS OF TAX LOSS HARVESTING

Tax loss harvesting offers several advantages, particularly for investors in taxable accounts:

• Reduced Tax Liability: Offsetting gains lowers your current-year tax bill, preserving more of your wealth [3].
• Improved After-Tax Returns: By minimizing taxes, you keep more capital invested, which can compound over time [3].
• Portfolio Flexibility: Harvesting losses allows you to rebalance or adjust your portfolio without triggering large tax consequences [3].
• Year-Round Opportunity: While often associated with year-end planning, tax loss harvesting can be executed whenever market conditions create opportunities [4].

Historically, disciplined tax loss harvesting has helped investors achieve higher after-tax returns, especially in volatile markets where price fluctuations create frequent loss opportunities [4].

RISKS AND CONSIDERATIONS

While powerful, tax loss harvesting isn’t without challenges. Here are key factors to consider:

• Wash-Sale Rule: Repurchasing a similar security too soon can negate the tax benefit. Careful planning is needed to maintain portfolio exposure while complying with IRS regulations [2].
• Transaction Costs: Frequent trading to harvest losses may incur brokerage fees or bid-ask spreads, which can erode benefits [3].
• Market Risk: Reinvesting in a different security may lead to different performance outcomes, potentially affecting your portfolio’s trajectory [3].
• Tax Rate Changes: The value of harvested losses depends on your current and future tax rates. If rates decline, the benefit may be reduced [3].
• Complexity: Effective tax loss harvesting requires ongoing monitoring and expertise, particularly for large or complex portfolios [3].

To mitigate these risks, many investors work with experienced advisors who use sophisticated tools to identify opportunities and execute trades efficiently [4].

WHEN TO USE TAX LOSS HARVESTING

Tax loss harvesting is most effective in the following scenarios:

• High Tax Brackets: Investors in higher tax brackets benefit more from offsetting gains, as their tax savings are proportionally larger [1].
• Volatile Markets: Market downturns or corrections create more opportunities to realize losses [4].
• Concentrated Positions: If you hold concentrated stock positions with unrealized gains, harvesting losses elsewhere can offset taxes when diversifying [3].
• Taxable Accounts: Tax loss harvesting applies to taxable brokerage accounts, not tax-advantaged accounts like IRAs or 401(k)s [1].

It’s also worth noting that tax loss harvesting can be integrated into broader strategies, such as direct or custom indexing, where owning individual securities provides greater flexibility to harvest losses compared to index funds or ETFs [4].

BEST PRACTICES FOR EFFECTIVE TAX LOSS HARVESTING

To maximize the benefits of tax loss harvesting, follow these guidelines:

• Monitor Regularly: Review your portfolio frequently (e.g., monthly or quarterly) to identify loss opportunities, not just at year-end [4].
• Stay Disciplined: Use a systematic, data-driven approach to avoid emotional decisions that could disrupt your investment strategy [3].
• Plan for Reinvestment: Select replacement securities that maintain your portfolio’s risk and return profile while avoiding wash-sale violations [2].
• Track Losses: Maintain accurate records of realized losses and carryforwards to optimize future tax planning [1].
• Consult a Professional: Work with a financial advisor or tax professional to ensure compliance and align the strategy with your overall financial plan [3].

It’s also worth noting that tax loss harvesting can be integrated into broader strategies, such as direct or custom indexing, where owning individual securities provides greater flexibility to harvest losses compared to index funds or ETFs [4].

COMPLEMENTING TAX LOSS HARVESTING WITH ACTIVE MANAGEMENT

Tax loss harvesting pairs well with active investment strategies that emphasize high active share and momentum. A concentrated portfolio of 25-40 stocks, selected from a broad universe of equities, can enhance tax efficiency by providing ample opportunities to realize losses while pursuing outperformance. A disciplined process—using relative strength and momentum to identify winners and a mathematical sell discipline to eliminate underperformers—ensures consistency and risk control. Such a strategy’s low correlation to broad indexes can also improve diversification, complementing the tax benefits of harvesting [5].

BECOMING AN EXPERT: KEY TAKEAWAYS

To maximize the benefits of tax loss harvesting, follow these guidelines:

• Tax loss harvesting reduces tax liability by offsetting gains with realized losses, boosting after-tax returns [1].
• Strategic execution requires careful planning to avoid pitfalls like the wash-sale rule and excessive transaction costs [2, 3].
• Active management can enhance tax loss harvesting by providing flexibility to realize losses while pursuing alpha [5].

TAKE THE NEXT STEP: MEET COOKSONPEIRCE

Ready to harness the power of tax loss harvesting? At CooksonPeirce, a Pittsburgh-based, 100% employee-owned RIA founded in 1984, we manage over $2.5 billion in assets with a proprietary process refined over four decades. Our All-Cap Equity strategy integrates tax-efficient practices, as evidenced by our historical tendency to generate net short-term losses (data through 2024).

Contact us today to schedule a personalized consultation and discover how our disciplined, momentum-driven approach can optimize your portfolio’s tax efficiency.

FA use only. Past results are not a guarantee of future performance. Returns are presented gross of fees and do not reflect the deduction of management fees, which will reduce total return. Please refer to our Form ADV, Part II for our fee schedule.

How can CooksonPeirce help you serve your clients better?
To schedule a consultation, click here for Raymond James / Institutional, or click here for Private Client / Schwab. 

Sources

1. Thrivent. (2025). What Tax Loss Harvesting is & How it Works, With Examples
2. Porte Brown. (2025). Beware of the Wash Sale Rule when Harvesting Tax Losses.
3. Investopedia. (2025). Pros and Cons of Annual Tax-Loss Harvesting.
4. J.P. Morgan Asset Management. (2025). Continuous tax-loss harvesting yields more potential for tax savings.
5. General financial knowledge and practices, as tax loss harvesting in active management is a well-documented strategy in investment management literature and practice.

*Not for client use