Tax Loss Harvesting 101: How to Offset Capital Gains This Year

^{You had a great year. Your rental real estate appreciated significantly, or your business had strong performance. Now you’re facing a capital gains tax bill.}

^{Here’s what most investors don’t know: You can offset those gains with investment losses from the same year.}

^{Tax loss harvesting is one of the most underused tax strategies, especially for high-income earners. And it’s more straightforward than most people think.}

^{What Is Tax Loss Harvesting?}

^{Tax loss harvesting is selling investments at a loss to offset capital gains or ordinary income. The loss reduces your taxable income, which reduces your tax bill.}

^{Simple example:}

• You have a $50,000 capital gain from selling a rental property
• You sell an underperforming stock at a $20,000 loss
• Your net capital gain is now $30,000 (instead of $50,000)
• You’ve reduced your tax bill by approximately $6,000 (20% federal tax on the $20,000 loss)

^{Key benefit: You’re locking in a loss you’d eventually take anyway. By realizing that loss this year, you reduce taxes this year.}

^{How Much Can You Deduct?}

^{Capital losses offset capital gains dollar-for-dollar with no limit. If you have leftover losses after offsetting gains, you can use up to $3,000 per year against ordinary income. Unused losses carry forward indefinitely to future years.}

^Example:

• $80,000 capital gain from selling rental property
• You harvest $100,000 in losses from investments
• $80,000 offsets the gain → zero net gain
• $3,000 offsets ordinary income
• $17,000 carries forward to next year

^{This is valuable. You’ve created a “loss bucket” that offsets future years’ gains indefinitely.}

^{The Wash-Sale Rule: Critical to Know}

^{Here’s where most investors trip up: You can’t buy back the same investment within 30 days of selling it at a loss.}

^{The rule: Don’t buy the same (or substantially identical) investment within 30 days before or after the sale. If you do, the loss is disallowed.}

^{How to avoid it:}

• Sell a stock at a loss
• Buy a similar (but different) investment in the same sector
• Wait 31 days before repurchasing the original

^{Example: Sell Vanguard Total Stock Market (VTI) at a loss, immediately buy iShares Core S&P 500 (IVV). Same exposure, technically different; wash sale doesn’t apply.}

^{Track all sales carefully. Your broker doesn’t always flag wash sales, so you must monitor them.}

^{When to Harvest Losses}

^{Trigger #1: Significant Capital Gains}

• You’re selling rental property with large gains
• You had a strong business year with income
• You’re reallocating investments and realizing gains

^{Harvest losses before year-end to offset those gains.}

^{Trigger #2: Year-End Review}

^{December is prime time. You have visibility into your full year’s gains and losses. Harvest losses before December 31.}

^{Trigger #3: Rebalancing}

^{If your portfolio is tilted (too much in one sector), rebalancing might trigger gains. Before rebalancing, harvest losses from positions you’re reducing anyway.}

^{Trigger #4: Tactical Sell Signals}

^{If an investment has underperformed and you’re selling anyway, harvest the loss while you’re at it.}

^{Real Example: High-Income Professional}

^Situation:

• Sarah is a doctor with $250,000 salary
• She sold a rental property and realized a $60,000 capital gain
• Her investment portfolio has $30,000 in losses
• Combined federal + Colorado capital gains rate: 20%

^{Without tax loss harvesting:}

• Tax on $60,000 gain: $60,000 × 20% = $12,000

^{With tax loss harvesting:}

• She harvests the $30,000 in losses
• Net gain: $30,000
• Tax: $30,000 × 20% = $6,000
• Savings: $6,000

^{Tools for Tax Loss Harvesting}

^{Robo-advisors: Platforms like Wealthfront and Betterment automatically harvest losses. They monitor your portfolio and harvest when opportunities appear. Cost is usually included in the advisory fee.}

^{DIY approach: Track losses yourself in a spreadsheet. Requires discipline but gives complete control.}

^{Financial advisor: A tax-savvy advisor can identify harvesting opportunities and coordinate them with your overall plan. Usually most effective for higher-net-worth investors.}

^{Common Mistakes}

^{Mistake #1: Triggering wash sales by buying back the same investment too soon.}

^{Mistake #2: Harvesting losses haphazardly instead of coordinating with capital gains.}

^{Mistake #3: Harvesting too much, too late in the year.}

^{Mistake #4: Not coordinating with your CPA; she might spot a better strategy.}

^{Mistake #5: Harvesting losses and leaving the cash on the sidelines instead of redeploying it.}

^{Getting Started}

^{Here’s your action plan:}

^{Step 1: Calculate your expected capital gains for the year}

^{Step 2: Identify underperforming investments with losses}

^{Step 3: Calculate target losses to harvest}

^{Step 4: Plan replacement investments (avoid wash sales)}

^{Step 5: Coordinate with your CPA before executing}

^{Step 6: Harvest throughout October-November (not all at once)}

^{Step 7: Track all sales for your tax return}

^{Final Thought}

^{The taxes you save through smart loss harvesting are resources God has entrusted to you. That money can be reinvested in your business, given to your community, or provided for your family. Using this strategy isn’t avoiding taxes; it’s wisely managing the resources you’ve earned.}

^{Ready to harvest losses strategically? Schedule a consultation to discuss your capital gains and harvesting opportunities.}

^{Disclaimer: This content is for educational purposes only. Consult with a qualified tax professional before implementing any tax strategy.}