Just as October invites us to clean out closets and clear garden beds for winter, it can also be a natural time to tidy up the taxable side of a portfolio. One tool investors often hear about this time of year is tax‑loss harvesting—and despite the fancy name, the basic idea is pretty practical.
What is Tax‑loss Harvesting?
Tax‑loss harvesting is the process of selling an investment in a taxable account that’s down in value so you can realize a capital loss for tax purposes. That loss may help offset capital gains (and in some cases a limited amount of ordinary income), potentially reducing your tax bill.
Think of it as making the best of an “oops” holding: if something is already down, we may be able to put that paper loss to work—without losing sight of your long‑term plan.
A Simple Example:
Let’s say earlier this year you sold a mutual fund in your brokerage account and realized a $8,000 capital gain. You also own an ETF that’s currently down $8,000.
- If you sell the ETF at a loss of $8,000, that loss can potentially offset the $8,000 gain.
- The result may be a lower tax impact than if you had only the gain.
In many cases, we can also look for a similar (not identical) replacement investment to keep your portfolio aligned with your strategy—because the goal isn’t to “go to cash and hope.” The goal is to stay invested in a thoughtful way.
How it Works:
- Review taxable accounts (not IRAs/401(k)s, which generally work differently for taxes).
- Identify holdings with unrealized losses.
- Check for current or expected capital gains.
- Harvest losses where appropriate and, if needed, rebuild exposure with a suitable alternative.
A quick note: tax rules include the wash sale rule, which can disallow the loss if you buy the same or “substantially identical” investment too soon. This is one reason tax‑loss harvesting is best done carefully.
Who Does it Apply to?
Tax‑loss harvesting generally applies to investors who:
- Hold investments in a taxable account
- Expect capital gains this year (from selling investments, rebalancing, a business sale, or even embedded gains in a portfolio)
- Are in a situation where tax planning can meaningfully improve after‑tax results
It may be less relevant if most of your assets are in retirement accounts, or if taxes aren’t a major driver this year.
Best Time to Review it
By October, we usually have a clearer view of:
- What gains (or losses) have already occurred
- Whether mutual fund capital gain distributions may be coming
- Your year‑to‑date income picture
Takeaways
Tax‑loss harvesting isn’t about “winning back” losses—it’s about using the tax code thoughtfully while keeping your long‑term plan intact. If you’d like, we can review your taxable accounts and see whether harvesting losses could be a helpful year‑end move for you.
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.
Finance Forward, LLC and LPL Financial do not provide legal or tax advice. Please consult with your tax or legal advisor regarding your personal situation.