How to Save on Taxes Using Stock Loss Harvesting: A Simple Guide for Investors

This year, the stock market has seen a strong run, and many investors have enjoyed gains in their portfolios. But what if some of your investments didn’t do as well?

Here’s the good news: even if you’ve had losses, you can use them strategically to reduce your tax bill. Stock loss harvesting can help offset gains, lower your taxable income, and keep more money in your pocket. Whether you're planning for this year or preparing for the future, let’s break down how it works.

What is Stock Loss Harvesting?

Stock loss harvesting is a tax strategy that allows you to turn losses from underperforming investments into tax savings.

When you sell an investment at a loss, that loss becomes “realized” in the eyes of the IRS. You can then use it to offset gains from other investments, dollar for dollar. If your losses exceed your gains, you can even apply up to $3,000 to reduce your regular taxable income each year—and any leftover losses can be carried forward to future years.

For example:

• Imagine you sold Tesla stock and took a $10,000 loss.
• Later, you made $8,000 in profits by selling Nvidia stock.
• With stock loss harvesting, you can offset the $8,000 gain entirely and still have $2,000 left to reduce your regular taxable income.

Watch Out for the IRS Wash Sale Rule

Before you start selling your underperforming stocks, you need to understand the IRS wash sale rule.

The wash sale rule prevents you from claiming a tax loss if you buy the same or a “substantially identical” investment within 30 days before or after the sale. This creates a 61-day window to be mindful of: the day of the sale, plus 30 days before and after.

If you accidentally trigger the rule, your loss isn’t gone forever—it’s deferred and added to the cost basis of the new investment. You’ll eventually get to claim it, just not immediately.

Tips to Avoid the Wash Sale Rule:

1. Wait 31 days before rebuying the same investment.
2. Invest in similar but not identical assets, like ETFs in the same sector.

A Loophole for Cryptocurrency Investors

Here’s a bonus for crypto traders: the wash sale rule doesn’t apply to cryptocurrencies. The IRS treats crypto as property, not securities, so you can sell at a loss and repurchase immediately without triggering the rule. Keep detailed records, though—this loophole may not last forever.

Key Takeaways and Action Steps

1. Review Your Portfolio: Look for underperforming investments to strategically sell at a loss.
2. Mind the Deadline: Complete trades by December 31 to apply them for this tax year.
3. Understand the Wash Sale Rule: Avoid buying back the same investment within 31 days.
4. Carry Forward Losses: Use excess losses in future years to offset gains or taxable income.
5. Consult a Tax Professional: For complex situations, a CPA can help you maximize your tax savings.

Final Thought

Stock loss harvesting isn’t just a way to soften the blow of underperforming investments—it’s a smart tax strategy that can save you money.

Have questions? Leave a comment in my YouTube video. I’d love to help! If you found this guide helpful, share it with others, and subscribe for more tips on taxes, finances, and investing.