Skip to main content

Trim Your Tax Bill With Tax-Loss Harvesting

By July 26, 2022No Comments

Nobody likes investment losses, but they come with a silver lining: They can help you slash your tax bill.

The tax code allows investors to use losses realized when investments are sold to cancel out taxes on gains. Tax-loss selling, also known as tax-loss harvesting, can be especially appealing during protracted market declines of the type we’ve experienced during 2022. Not only can harvested losses be used to neutralize recently booked profits, but they can also be stockpiled to offset future tax liabilities on capital gains—and even a portion of non-investment income such as wages.

While tax-loss harvesting can help ease the sting of losses, it’s not appropriate for all types of investment accounts. And there are situations in which it’s best avoided.

How Tax-Loss Harvesting Works

To offset tax liabilities, investors must sell a portfolio holding and book a capital loss—the difference between the investment’s purchase price and its sale price. Those losses can be used to neutralize the corresponding amount of taxes on gains earned from selling holdings that have appreciated in price.

For example, you sell Stock A—let’s say it’s a construction company stock—and book a loss of $1,000. You also sell Stock B—perhaps an energy stock—for a gain of $1,000. The loss in that case could be used to cancel out the entire tax bill for the gain on Stock B. Stocks that have been held for under a year are subject to a higher capital gains tax rate than stocks held longer than a year, so it’s most impactful to cancel out those short-term gains first. That being said, long-term investors shouldn’t make a habit of short-term trading: Patience is generally a far more reliable tool for achieving one’s investment goals.

The Benefit of Flexibility

It’s worth noting that losses from one kind of asset can be used to offset gains from another. For instance, losses booked by selling a stock can negate gains realized from the sale of a bond fund, or even a real estate holding. If your losses are larger than the gains, you can use the remaining losses to offset up to $3,000 of your ordinary taxable income. If an investor doesn’t have $3,000 of taxable capital gains in a given year, the balance of the excess can be applied to ordinary income.1 It gets even better: Unused losses can be carried forward throughout the seller’s lifetime to offset future gains and can be transferred to a spouse upon death. Unfortunately, losses can’t be used to offset gains realized in prior years.  

The Wash-Sale Rule

Tax-loss sellers must carefully adhere to IRS rules. Selling a holding and then promptly rebuying the investment, or a substantially identical one, isn’t permitted. Under the “wash-sale rule,” which is meant to keep investors from gaming the system, one can’t buy the same stock or exercise stock options 30 days before or after the sale from any investment account they own (including IRAs).  

Naturally, the availability of a good replacement holding should be considered before selling.

The Limits of Tax-Loss Selling

Tax-loss harvesting is limited to transactions in taxable accounts. Selling holdings in a tax-advantaged account such as a 401(k) or IRA doesn’t create annual tax consequences, so realized losses in those vehicles can’t be used to cancel out gains in taxable accounts.

Long-term investors shouldn’t sell holdings just to minimize their tax pain—especially when the holdings they’re considering selling may only be experiencing temporary weakness. While it’s sometimes necessary to cut our losses on certain investments, achieving long-term goals, such as funding retirement, requires us to remain patient and disciplined. In other words, don’t let the tax tail wag the investing dog.

Consider Other Strategies

Keep in mind that tax-loss selling is just one tax-management strategy. Donating appreciated assets to charity, for instance, might yield greater tax savings. Donors typically don’t owe tax on the gifted assets’ gains, and the donation earns them a charitable deduction.

Why Life Expectancy Matters

On a very practical note, life expectancy should be factored into tax-management strategy. It might not make sense to harvest losses for use in future years since capital losses expire at death. What’s more, assets’ capital gains are no longer recognized for tax purposes after their owner is deceased, meaning they don’t need to be sheltered.

The Big Picture

Accumulating wealth isn’t just about what you earn—it’s about what you keep. And when it comes to keeping more, tax-management strategies like tax-loss harvesting can make a meaningful difference over time. Speak with your wealth advisor and tax professional to determine when or if this tax strategy makes sense for you.


1IRS: Topic No. 409 Capital Gains and Losses

The information contained herein is not intended to be personalized investment or tax advice or a solicitation to engage in a particular investment strategy. The views expressed are for informational and educational purposes only and do not consider any individual personal, financial, or tax considerations. Please consult a financial professional before making any financial-related decisions.

AdvicePeriod is another business name and brand utilized by both Mariner, LLC and Mariner Platform Solutions, LLC, each of which is an SEC registered investment adviser. Registration of an investment adviser does not imply a certain level of skill or training. Each firm is in compliance with the current notice filing requirements imposed upon SEC registered investment advisers by those states in which each firm maintains clients. Each firm may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by an advisor with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about Mariner, LLC or Mariner Platform Solutions, LLC, including fees and services, please contact us utilizing the contact information provided herein or refer to the Investment Adviser Public Disclosure website ( Please read the disclosure statement carefully before you invest or send money.

For additional information as to which entity your adviser is registered as an investment adviser representative, please refer to the Investment Adviser Public Disclosure website ( or the Form ADV 2B provided to you. Investment adviser representatives of Mariner, LLC dba Mariner Wealth Advisors and dba AdvicePeriod are generally employed by Mariner Wealth Advisors, LLC. Investment adviser representatives of Mariner Platform Solutions, LLC dba AdvicePeriod, are independent contractors.