Tax loss harvesting is one of the most effective investment strategies available for high-net-worth investors who want to minimize capital gains taxes and keep more money working in the markets. This approach uses loss harvesting to turn market declines into a tax advantage by strategically selling investments that have declined in value and using those tax losses to offset long term capital gains, offset ordinary income, and even carry losses forward to future tax years. In 2025, volatile markets and evolving tax laws have created an environment where a disciplined tax loss harvesting strategy can have a meaningful impact on your overall wealth plan. At Towerpoint Wealth, we view tax loss harvesting not as a year-end scramble, but as a year-round, fiduciary-focused investment strategy designed to reduce your tax burden while maintaining your long-term portfolio goals.
Understanding Tax Loss Harvesting
What Is Tax Loss Harvesting?
At its core, tax loss harvesting works by taking a capital loss from one part of your portfolio and using it to reduce taxable gains from another. If your capital losses exceed your capital gains for the tax year, you can use up to $3,000 to offset income like ordinary income, with any excess losses eligible to carry forward into future years. This approach applies only to taxable accounts and cannot be used within retirement accounts such as IRAs or 401(k)s. For tax purposes, the Internal Revenue Service treats selling securities at a loss as a recognized event, allowing you to apply those losses against capital gains taxes and reduce your overall income tax liability.
How Tax Loss Harvesting Works Step-by-Step
- Identify investments sold or selling investments in your taxable portfolio that are worth less than their purchase price, creating investment losses.
- Sell those positions, realizing a capital loss that the Internal Revenue Service will allow you to apply against capital gains taxes.
- Immediately reinvest the proceeds into a similar, but not substantially identical, investment such as a different mutual fund, ETF, or individual stocks to maintain market exposure while avoiding the wash sale rule.
- Use realized tax losses to offset gains, reduce taxable income, and lower your tax bill for the current tax year.
- If your capital losses exceed your gains, you can carry forward the balance to future tax years, helping to offset investment income and reduce the amount you pay taxes on in the future.
Why Tax Loss Harvesting Matters in 2025
The Market Context
The first half of 2025 has seen sharp market swings, creating ideal conditions for loss harvesting. Large asset managers harvested billions in tax losses, with strategies designed for potentially lowering clients’ tax liability and maintaining portfolio discipline. This volatility means more opportunities to sell underperforming investment B or same stock positions, realize losses, and redeploy capital into other opportunities without changing the overall portfolio risk profile.
Benefits for High-Net-Worth Investors
High-net-worth investors often face large taxable capital gains from investment gains and distributions. Many of these gains, especially short term capital gains, are taxed at a higher tax rate because they are held for less than a year. By using tax loss harvesting, you can reduce or eliminate these term capital gains tax obligations. For long term gains on assets held more than a year, tax loss harvesting still provides value by reducing taxable gains and shifting income from a higher tax bracket into a lower tax bracket. The result is a smaller tax bill, greater tax savings, and more assets left to grow for future years.
The Rules You Can’t Ignore
The Wash Sale Rule
The wash sale rule is one of the most critical tax loss harvesting rules. The Internal Revenue Service disallows a tax loss if you buy the same investment or a substantially identical security within 30 days before or after the sale. This applies across all accounts, including retirement accounts, and to your spouse if married filing separately or jointly. For example, selling a mutual fund tracking the S&P 500 and buying another substantially identical stock or ETF tracking the exact same index within the 30-day window would trigger a wash sale. To comply, replace the sold position with a similar, but not substantially identical, investment B to maintain market exposure without losing the tax break.
Eligible vs. Ineligible Accounts
Tax loss harvesting works only in taxable accounts. You cannot use it within tax deferred or tax-exempt accounts such as IRAs, Roth IRAs, 401(k)s, or 529 plans because gains and losses in these accounts are not recognized by the Internal Revenue Service for tax purposes until withdrawal. This distinction is critical to prevent wasted transactions that will not produce tax savings.
Tracking and Documentation
Accurate cost basis tracking is essential to ensure the right lots are sold to generate the desired capital loss. Methods like FIFO, LIFO, or Specific Identification can be used strategically to select which shares are sold. Proper documentation is required for the tax year when reporting to the Internal Revenue Service, typically using Form 8949 and Schedule D.
Best Practices for Maximizing Tax Loss Harvesting
Year-Round Harvesting vs. Year-End Only
While many investors harvest losses in December, market declines can occur at any point in the tax year. A disciplined, year-round approach captures more opportunities for tax savings and offset income than waiting until year-end.
Automation and Direct Indexing
Technology now allows tax loss harvesting strategy execution on a daily basis. Direct indexing, where you hold individual stocks instead of a single mutual fund, enables harvesting at the security level. This allows more granular loss harvesting and greater customization, which is particularly valuable for high-net-worth investors in a higher tax bracket.
Integrating TLH Into a Holistic Wealth Plan
Tax loss harvesting should be part of a coordinated wealth strategy. At Towerpoint Wealth, we integrate it with charitable giving, estate planning, and retirement income strategies. For example, pairing loss harvesting with donating appreciated investments sold can create a double tax break while maintaining portfolio balance.
Potential Drawbacks and Risks
Short-Term Portfolio Drift
Selling a position to harvest a capital loss may temporarily shift your portfolio away from its target allocation. If markets rebound quickly, you might miss gains. Using replacement investments that are not substantially identical but have similar performance characteristics can mitigate this.
Transaction Costs and Execution Complexity
Frequent selling securities and repurchasing can increase costs. If these costs outweigh the tax savings, the strategy may be counterproductive. Professional guidance from a tax professional or financial advisor can help ensure your approach is efficient.
Behavioral Pitfalls
Chasing tax losses without considering overall portfolio quality can be harmful. Selling strong, long-term holdings solely for a tax break may undermine performance. Balancing personal finance goals with tax savings objectives is key.
Case Study – Tax Loss Harvesting in Action
A Towerpoint Wealth client realized $500,000 in investment gains in 2025, including a large amount of short term capital gains. By executing a disciplined tax loss harvesting strategy, we sold underperforming positions, realizing $300,000 in tax losses. These losses were used to offset capital gains, reduce tax liability, and lower the client’s tax bill. At a combined federal and state tax rate of 28%, this produced $84,000 in immediate tax savings, with additional carry forward benefits for future tax years.
Frequently Asked Tax Loss Harvesting Questions
Can I do tax loss harvesting myself, or should I work with an advisor?
While possible to do yourself, working with a financial advisor ensures compliance with wash sale rule restrictions, optimizes cost basis selection, and integrates the strategy with broader financial goals.
What happens if I trigger the wash sale rule?
The disallowed tax losses are added to the cost basis of the new security, delaying the benefit until the replacement is sold.
Is there a limit to how much I can harvest in a year?
No, but you can only offset gains dollar-for-dollar, plus $3,000 against ordinary income. Excess amounts carry forward.
Can I use tax loss harvesting for cryptocurrency?
Yes, but as of recent tax laws, these transactions are also subject to the wash sale rule.
Does tax loss harvesting help in a rising market?
Even in rising markets, individual holdings or mutual funds may decline, offering opportunities for loss harvesting.
Can I harvest losses in mutual funds?
Yes, but ensure the replacement is not a substantially identical security to avoid a wash sale.
Conclusion – Turning Volatility Into Opportunity
Tax loss harvesting is more than a tactic, it is a disciplined, proactive way to manage taxable income and keep more of your wealth invested. By understanding tax loss harvesting works, following the wash sale rule, using accurate cost basis methods, and integrating the process into a holistic wealth plan, high-net-worth investors can achieve significant tax savings. At Towerpoint Wealth, we ensure that your tax loss harvesting strategy aligns with your long-term objectives, helps offset capital gains, and reduces your tax burden while protecting your portfolio from unnecessary risk.
Call to Action
Let us help you use tax loss harvesting to reduce your tax bill and keep more of your wealth compounding. Contact Towerpoint Wealth today to schedule a confidential consultation.
