Reduce your tax bill this year by selling losing stocks strategically

Markets don’t always cooperate with your financial plans. But sometimes, a loss on paper can still deliver a strategic win—if you know how to work with the tax system, not against it. That’s the core logic behind a technique called tax loss harvesting. It’s not flashy, it’s not risky, and it doesn’t require predicting the market. But it could quietly soften the impact of your portfolio losses and help improve your future investment returns in after-tax terms.

With interest rates still elevated, tech valuations adjusting, and sectors like real estate, renewable energy, and speculative growth stocks cycling through underperformance, 2025 has not been kind to many retail investors. If your portfolio is in the red, it’s understandable to feel frustrated. But part of effective financial planning is knowing how to respond when your investments don’t go as expected. That includes taking advantage of the tax code’s lesser-known features—like the ability to offset gains with realized losses.

Tax loss harvesting works like this: you sell an investment that has dropped in value, lock in the loss, and use that loss to offset capital gains from other sales—or even reduce your taxable income. You can then reinvest the proceeds into a different asset, one that preserves your long-term market exposure without triggering what’s known as a wash sale.

For example, say you bought $10,000 worth of stock in a clean energy ETF in early 2024, and it’s now worth $6,800. If you sell it, you realize a $3,200 capital loss. If you also sold a tech stock earlier in the year for a $2,000 profit, the loss fully offsets the gain—and the remaining $1,200 can be used to reduce your ordinary taxable income. If you have no gains to offset, the IRS still lets you deduct up to $3,000 per year against income, and unused losses carry forward to future years indefinitely.

That makes this more than a one-time tax trick. It’s a way to store tax value today and apply it as needed across future market cycles, especially if you expect concentrated gains later—through employee stock options, real estate sales, or portfolio rebalancing.

Many investors think of tax loss harvesting as a December ritual—a last-minute portfolio cleanup to minimize that year’s tax liability. But the most effective strategies are often executed throughout the year, when markets move sharply or when asset performance diverges. That’s especially relevant in a year like 2025, when rate-sensitive sectors have corrected unevenly and some previously high-flying stocks have entered prolonged downturns.

The benefit of in-year harvesting is twofold. First, you may be able to reinvest in a similar asset early enough to capture a rebound. Second, by harvesting losses opportunistically—say, after a disappointing quarterly earnings report or sectorwide selloff—you’re not waiting until year-end, when market prices may have recovered and the loss window has closed.

That said, tax loss harvesting should still align with your overall strategy. If you believe in the long-term value of a position, don’t harvest just because it’s down temporarily. Consider whether it’s part of a structural reallocation—away from individual stocks into ETFs, from concentrated sectors into diversified holdings, or from legacy holdings into tax-efficient fund structures.

The IRS has a rule designed to prevent abuse of tax loss harvesting, and it’s one of the most important technicalities to get right. If you sell a security at a loss and then buy the same or a "substantially identical" one within 30 days before or after the sale, the loss is disallowed for tax purposes. This is called a wash sale.

In practice, this means you can’t sell Apple stock on Monday, realize a loss, and buy it back the following week. You’d have to wait 30 days before repurchasing to preserve the loss. However, you can maintain exposure to the broader market or sector by purchasing a similar—but not identical—investment. For example, if you sell a tech ETF like QQQ, you could replace it with XLK or a diversified growth index fund. The idea is to keep your portfolio aligned while avoiding a wash sale that nullifies the tax benefit.

For those who use robo-advisors or automated portfolios, be aware: many platforms offer automatic tax loss harvesting, but they may not explain the substitutions being made. You’ll want to ensure that rebalancing doesn’t accidentally trigger wash sales, especially if you’re managing multiple accounts or reinvesting dividends during the 30-day window.

Tax loss harvesting isn’t a standalone strategy. It works best when embedded inside a consistent long-term financial plan. That means knowing your target asset allocation, understanding your risk tolerance, and managing both the tax and psychological impacts of selling investments at a loss.

It also matters what kind of account you’re using. Tax loss harvesting only applies to taxable investment accounts, not to IRAs, 401(k)s, or other tax-deferred vehicles. So while you can’t use this strategy within your retirement portfolio, you can still harvest losses in brokerage accounts and use them to improve your overall after-tax return.

If you're nearing retirement or a major liquidity event—like selling a business or property—building up a bank of loss carryforwards through strategic harvesting can help reduce the tax impact of those gains when they occur. That makes this tactic especially relevant for mid-career professionals and early retirees managing income smoothing.

And for those with estate planning considerations, harvesting losses can be part of a broader strategy to optimize tax basis for heirs. While appreciated assets benefit from a step-up in basis at death, unrealized losses do not. So it can be more tax-efficient to realize losses now than to hold underwater assets indefinitely.

The biggest mistake investors make with tax loss harvesting is using it as a reactive tactic rather than a proactive part of their portfolio strategy. Selling in panic or without a plan for reinvestment can lead to poor asset allocation, higher transaction costs, or missed rebounds. You should always ask yourself:

• Do I have capital gains this year to offset—or likely next year?
• Am I selling for a real reason, or just because the number is red?
• Is there a similar asset I can buy that keeps my portfolio aligned?
• Am I close to triggering a wash sale through auto-investment, DRIPs, or recent purchases?

It also helps to coordinate with a tax professional if your tax situation is complex. For example, if you’re subject to the Alternative Minimum Tax (AMT), or if you have carryforward losses from previous years, your strategy may differ.

For higher-income investors, understanding how harvested losses interact with the 3.8% Net Investment Income Tax (NIIT), capital gains surtax, and state-level taxes can also change the calculus. In high-tax states like California or New York, the benefit of harvesting losses is amplified. In states with no income tax, the impact is more muted.

One of the persistent myths around tax loss harvesting is that it’s only useful for the ultra-wealthy or those with complex portfolios. But even for modest investors, the benefit can be meaningful. A $3,000 deduction against ordinary income saves $720 in federal taxes for someone in the 24% bracket—and that’s before state taxes.

Over a 10-year period, the ability to carry forward and stack losses can make a measurable difference in after-tax return. For those on fixed incomes or approaching financial independence, small efficiencies in tax planning can stretch retirement assets and reduce sequence-of-return risk.

It’s also a strategy that rewards consistency. Even if you’re only harvesting a few hundred dollars in losses this year, building the habit of tax-aware portfolio management puts you in a better position for years when markets swing more dramatically. It’s not about chasing losses—it’s about building control.

Many robo-advisors like Betterment, Wealthfront, and Schwab Intelligent Portfolios offer automatic tax loss harvesting for clients. These systems run daily or weekly scans to identify opportunities and execute trades automatically, often with substitution logic built in to avoid wash sales. For investors with relatively simple portfolios and comfort delegating, this can be an efficient way to integrate tax strategies into passive investing.

However, if you’re managing a more complex portfolio—or if you’re combining index funds with individual stocks—it’s worth learning the mechanics yourself or working with a tax-aware advisor. A certified financial planner or tax professional can help ensure that the strategy aligns with your broader goals, doesn’t interfere with income planning or retirement timelines, and is properly reported on your tax return.

Remember: harvesting the loss is only part of the equation. You’ll need to report it accurately, track carryforwards, and ensure that your reinvestment choices don’t distort your long-term asset allocation. The tactic is simple—but it requires discipline to execute well.

When markets dip, it’s easy to feel like the only option is to wait or retreat. But the tax code gives you a third path—one that allows you to accept reality, make it work in your favor, and set the stage for recovery. Tax loss harvesting isn’t about beating the market. It’s about improving your position, preserving flexibility, and reducing the drag of taxes over time.

The most powerful part of this strategy isn’t the loss itself. It’s the control it gives you. Control to shape your tax exposure. Control to reposition your portfolio. And control to align your money with your plan—not just your emotions.

In volatile years, that control matters more than ever.