Tax-Loss Harvesting 2025: Turn Market Dips Into Long-Term Tax Savings
- Gustaf Rounick, CFP®, ChFC®
- Jul 22
- 6 min read
Updated: Jul 24
What Is Tax-Loss Harvesting?
Tax-loss harvesting (TLH) is the practice of deliberately selling an investment that sits below your purchase price so the realized capital loss can offset current or future capital gains and, in limited amounts, ordinary income[1] (Schwab Brokerage).
Why It Matters in 2025
Capital-gains brackets remain 0 %, 15 %, or 20 % depending on taxable income, and any unused losses carry forward indefinitely[2] (IRS). TLH lets you “bank” those losses during market pullbacks for use when gains resurface.
Mechanics: Sell, Offset, Reinvest
Sell the losing position.
Offset realized gains; if losses exceed gains you may deduct up to $3,000 against ordinary income each year[2] (IRS).
Reinvest in a different holding so your asset mix stays on target.
The Wash-Sale Rule
If you buy the same or a “substantially identical” security within 30 days before or after the sale, the IRS disallows the loss and adds it to the new cost basis[3] (Kiplinger). Use an alternate fund or wait 31 days to stay compliant.
Short-Term vs. Long-Term Losses
Losses retain the holding-period character of the asset sold, so short-term losses first offset short-term gains (taxed at ordinary-income rates). Long-term losses follow the same logic with long-term gains, then any leftover loss can offset the opposite type.
Offsetting Ordinary Income
After gains are netted, up to $3,000 of remaining net loss (married couples filing jointly share the same limit) can reduce ordinary income such as wages[1] (Schwab Brokerage).
Step-By-Step Harvesting Playbook
Inventory positions below cost basis.
Prioritize high-basis lots (specific-share identification helps).
Execute trades before year-end (or opportunistically during sell-offs).
Reinvest in a similar, but not identical, security (e.g., swap an S&P 500 index fund for a total-market fund).
Document trade dates, share IDs, and replacement holdings for your records.
Beware of Common Pitfalls
Accidentally triggering a wash sale with automatic dividend reinvestments.
Harvesting in tax-advantaged accounts (TLH applies only to taxable brokerage accounts)[4] (Investopedia).
Letting tax decisions override sound investment policy—don’t sell quality assets solely for a deduction.
Case Study: Harvesting in the 2022–2023 Bear Market
Imagine an investor who bought $25,000 of a broad U.S. equity ETF in late 2021. By June 2022 the position had fallen to $19,000—a 24 % unrealized loss. They:
Sold the ETF, realizing the $6,000 loss.
Shifted proceeds into a total-market ETF with 97 % correlation, avoiding wash-sale treatment.
Used the $6,000 loss to offset $4,000 in short-term gains and $2,000 of ordinary income that year. When the market rebounded in 2023, the replacement ETF appreciated, but the harvested loss continued to shelter taxable gains until fully used.
Ideal Accounts and Securities
Highly correlated ETFs and mutual funds make replacements easy. Individual stocks work, too, but ensure enough diversification afterward.
Timing Market Dips—Don’t Time the Market
Harvest opportunistically when markets dip, but avoid speculation. Consistent, rules-based reviews (quarterly or after big swings) keep emotions out.
Using Index Funds & ETFs
Swapping between broad-market ETFs minimizes tracking-error risk while still satisfying the “not substantially identical” requirement.
Mutual-Fund Distributions: Timing Your Harvest
Mutual funds often pay sizeable capital-gain distributions near year-end. Check the fund company’s projected payout calendar; harvesting losses before the record date can offset those looming gains and avoid “buying” a tax liability. Conversely, delaying a harvest until after the distribution date may capture an extra loss because the share price drops once the distribution is paid [5] (Fidelity).
Crypto & Other Assets Outside the Wash-Sale Rule
Because cryptocurrency, commodities, and foreign-currency ETFs are not yet covered by the IRS wash-sale rule, you can sell and immediately repurchase the same coin or fund to capture a loss without waiting 30 days. Congress has discussed closing this loophole, so document every trade and stay alert for rule changes [6] (CoinLedger).
How Robo-Advisors Automate Harvesting
Many automated platforms scan daily for losses and execute small TLH trades, useful for investors who prefer a set-and-forget approach.
Coordinating With Portfolio Rebalancing
Pair TLH with scheduled rebalancing—trim overweight winners, harvest laggards, and reinvest to restore your target mix without extra trades.
Charitable Giving & TLH: A One-Two Punch
Pairing TLH with charitable gifting can maximize after-tax impact. Harvest losses to reduce current-year gains, then donate appreciated winners (held > 1 year) to a donor-advised fund and deduct the full fair-market value. You sidestep capital-gains tax on the gift while trimming an overweight holding—two tax benefits in one strategy [7] (Fidelity Charitable).
Recordkeeping & Cost-Basis Methods
Use specific-share identification for precision; keep trade confirms and brokerage 1099-B forms. Good records make Schedule D easier and defendable in an audit.
Tech & Tools: Automating the Paper Trail
Modern brokerage dashboards, Excel add-ins, and specialized apps can scan portfolios daily for harvestable lots, flag impending wash-sale conflicts, and export Schedule D-ready reports. Even if you prefer manual trades, using software to track specific-share IDs and carryforwards reduces errors and strengthens audit defenses. IRS Publication 550 spells out the records you must keep [9] (IRS).
State-Level Nuances: The California Example
States don’t always follow federal rules. California, for example, limits capital-loss deductions to the amount allowed federally but tracks loss carryovers separately; only losses tied to California-source income survive year-to-year [8 ](Franchise Tax Board). High-earners should model both federal and state outcomes before executing large TLH transactions.
Compliance & Professional Guidance
Wash-sale nuances, state-tax quirks, and changing brackets argue for professional tax advice. Coordinate TLH decisions with your financial planner to ensure they align with your broader goals.
Key Takeaways
TLH converts paper losses into real tax assets.
Respect the 30-day wash-sale window.
Prioritize investment merit over tax optics.
Keep impeccable records and revisit the strategy each year.
People Also Ask (FAQ)
Does tax-loss harvesting lower my adjusted gross income?
Yes. After you net capital gains and losses, up to $3,000 of any remaining net loss ($1,500 if married filing separately) can offset ordinary income every year. Because ordinary income feeds directly into your AGI, the deduction reduces both your taxable income and the thresholds that determine Medicare premiums and certain tax credits [10] (Investopedia).
Can I harvest losses inside an IRA or 401(k)?
No. Sales inside tax-advantaged accounts do not create deductible losses, and if you sell shares at a loss in your taxable account and repurchase them in an IRA within 30 days, Revenue Ruling 2008-5 treats the move as a wash sale—your loss is permanently disallowed [11] (Investopedia).
What happens if I accidentally trigger a wash sale?
The IRS defers, rather than erases, the benefit: the disallowed loss is added to the cost basis of the replacement shares and becomes deductible only when you eventually sell that new lot. You lose the timing advantage, not the loss itself [12] (BlackRock).
Is tax-loss harvesting worthwhile if I’m in the 0 % capital-gains bracket?
Often not this year, but it may still pay off. Banking losses now lets you offset future gains that could be taxed at 15 % or 20 % if your income rises. For many retirees or business owners with volatile earnings, that future hedge can be valuable [13] (Morgan Stanley).
Do wash-sale rules apply to cryptocurrency?
Not as of July 2025. Digital assets remain outside IRC § 1091, so you can sell and immediately rebuy the same coin and still claim the loss. Bills such as the Lummis crypto-tax reform proposal would extend wash-sale treatment to crypto, so monitor legislation before relying on the loophole [14] (TokenTax).
Gustaf Rounick, CFP®, ChFC®
Disclaimer
This material is for informational purposes only and should not be construed as individualized tax, legal, or investment advice. Tax rules are subject to change, and individual situations vary. Consult a qualified tax professional before implementing any strategy. Past performance does not guarantee future results.
Works Cited
[1] Charles Schwab, “How to Cut Your Tax Bill with Tax-Loss Harvesting.”
[2] IRS, “Topic No. 409, Capital Gains and Losses.” https://www.irs.gov/taxtopics/tc409
[3] Kiplinger, “The Wash Sale Rule: Six Things to Know to Avoid Tax Pitfalls.” https://www.kiplinger.com/taxes/604947/stocks-and-wash-sale-rule
[4] Investopedia, “How a Simple Tax Tactic Could Help You Offset Stock Losses This Year.” https://www.investopedia.com/this-simple-tax-tactic-could-help-you-offset-stock-losses-11730261
[5] Fidelity, “Tax-Loss Harvesting: Gains and Losses in Mutual Funds.”
[6] CoinLedger, “Crypto Wash-Sale Rule: Tax Savings 2025.”
[7] Fidelity Charitable, Case Study: Donating Appreciated Securities.
[8] California FTB, “Capital Gains and Losses.”
[9] IRS Publication 550 (2024), Investment Income and Expenses.
[10] Investopedia, “How Tax-Loss Harvesting Works for Retail Investors.” https://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp
[11] Investopedia, “Can IRA Transactions Trigger the Wash-Sale Rule?” https://www.investopedia.com/articles/retirement/09/ira-wash-sale-rule.asp
[12] BlackRock, Tax-Loss Harvesting at a Glance (PDF). https://www.blackrock.com/us/individual/literature/brochure/loss-harvesting-and-wash-sale-rule-considerations-en-us.pdf
[13] Morgan Stanley, Tax-Loss Harvesting (March 2024 PDF). https://advisor.morganstanley.com/hls-wealth-management/documents/field/h/hl/hls-wealth-management/Tax_Loss_Harvesting_2024.pdf
[14] TokenTax, “Crypto Wash-Sale Rule: 2025 IRS Rules.” https://tokentax.co/blog/wash-sale-trading-in-crypto
