Depending on how and when it's used, tax-loss harvesting can be a smart year-end move or a long-term tax strategy.

By selling investments at a loss to offset capital gains, investors can reduce their tax burden and potentially improve after-tax returns. But, like many tax strategies, tax-loss harvesting comes with important rules and trade-offs that investors should understand.

Understanding Tax-Loss Harvesting

At its core, tax-loss harvesting is🧸 a way to use investment losses to your advantage.

When you sell a security in a taxable account for less than what you paid for it, you realize a 澳洲幸运5官方开奖结果体彩网:capital loss. That loss can be used to offset 澳洲幸运5官方开奖结果体彩网:capital gains elsewhere in your portfolio, potentially reducing your tax bill.

“You can utilize realized capital losses to offset capital gains in the current year,” explains , founder of Ametrine Wealth. “If you have more than enough in losses to offset your capital gains, you can take a net loss of up to $3,000 per year and carry the remaining losses forward to the next tax year.”

This process can be done periodically or annually, depending on market conditions and your personal tax situation.

Tax Implications and Considerations

Tax-loss harvesting is especially relevant for investors in higher tax brackets or those expecting large🦹 c💟apital gains.

“The primary value of tax-loss harvesting lies in offsetting 澳洲幸运5官方开奖结果体彩网:realized capital gains—whether from portfolio activity or asset sales outside the portfolio," says , an investment partner at Callan Family Office. Capital losses are first matched against gains of the same type—澳洲幸运5官方开奖结果体彩网:short-term with short-term, long-term with long-term. If losses exceed gains, the surplus can then offset up to $3,000 of 澳洲幸运5官方开奖结果体彩网:ordinary income. Any unused losses can be carried forward indefinitely.

High-net-worth investors should also consider the 3.8% 澳洲幸运5官方开奖结果体彩网:net investment income tax (NIIT) (which applies to investment income above certain thresholds) and state-level taxes, both of which can increase the benefit of harvesting losses even more.

The Wash-Sale Rule

The IRS imposes an important limitation on tax-loss ha𒁏rvesting called the wash-sale rule.

This rule prohibits taxpayers from officially claiming a loss if they purchase a security 30 days before or after the loss transaction that's overly similar to the one they sell. That includes repurchasing the same investment in a different account, such as an IRA.

Adams explains: “The wash sale rule prevents you from claiming a tax deduction for a loss on a security if you buy a '澳洲幸运5官方开奖结果体彩网:substantially identical' investment within 30 days before or after the sale.” She adds that one workaround is to sell a fund and replace it with something similar, but not identical, such as “swapping an 澳洲幸运5官方开奖结果体彩网:S&P 500 fund for a 澳洲幸运5官方开奖结果体彩网:Russell 3000 Index fund.”

Burke also notes that wash sales can be especially tricky in some situations: “This risk increases in complex portfolios, especially when multiple managers are trading independently or when an investor holds assets across several taxable entities under a common taxpayer."

Pros of Annual Tax-Loss Harvesting

🎃 One of the clearest benefits of annual tax-loss harvesting is the potential for tax savings. By selling losing investments and replacing them with similar ones, investors can stay invested while reducing their taxable gains. “Tax-loss harvesting allows investors to realize lo💖sses for tax purposes while remaining invested in the market,” says Burke.

By reducing the tax impact of winning trades, it also supports 澳洲幸运5官方开奖结果体彩网:rebalancing. It creates flexibility for 🐎portfolio transitions, as well. “Taken together, tax-loss harvesting is more than just a tax-efficient investment strategy—it is a practical tool for improving portfolio positioning based on changing market conditions or investor circumstances."

Burke adds that, in volatile markets, harvesting losses also helps “bank” deductions for future use, potentially saving thousands of dollars over time.

Cons of Annual Tax-Loss Harvesting

Despite its advantages, tax-loss harvesting isn’t always appropriate or available. If all your investments have risen in value, you may not have any losses to harvest. Nevertheless, for many investors "who are regularly investing in a taxable account, there will likely be at least some tranches of shares that are at a loss during a down market,” Adams notes.

There’s also the issue of cost. “If you would be paying more in 澳洲幸运5官方开奖结果体彩网:transaction fees for the trades than you are able to save in taxes for harvesting the loss, then obviously it’s not worth doing,” she c🍒autions.

Burke also highlights other challenges, including the "operational complexity that comes with managing tax-loss harvesting across multiple 澳洲幸运5官方开奖结果体彩网:custodians, legal entities, or investment strategies.” In such cases, he recommends reaching out to an advisor to help provide coordinated oversight across your portfolio.

Strategic Considerations

Tax-loss harvesting works best as part of a broader wealth st🌜rategy—not just an end-of-year🌜 move.

“Rather than bein🦄g treated as a one-off, year-end tactic, it works best as a proactive, year-round strategy aligned with tax, investment, and liquidity planning,” says Burke.

He adds that this strategy can be accelerated in years when investors expect large gains—such as from the sale of a business or real estate—and integrated with gifting strategies or contributions that reset the 澳洲幸运5官方开奖结果体彩网:cost basis.

The Bottom Line

Tax-loss harvesting can be a powerful tool for investors looking to manage capital gains, lower taxes, and imp🌠r🐼ove portfolio efficiency.

But it’s not a one-size-fits-all approach. It's crucial to understand how the strategy works within your broader financial plan—being mindful of IRS rules like the wash-sale rule—to realize the maximum benefits.

For many investors, the benefits of harvesting losses can outweigh the costs, particularly when the strategy is deployed consistently and in coordination with professional advice.