By Spencer Schamle
Financial Advisor at Investment Consulting Group

Published October 14th, 2026

Tax-Loss Harvesting: How It Works and When It May Make Sense

Investing in a taxable account comes with an important consideration that doesn't apply in the same way to tax-deferred or tax-free accounts: the tax consequences of buying and selling investments can affect your after-tax returns.

One strategy investors may use to manage those tax consequences is tax-loss harvesting.

Tax-loss harvesting involves selling an investment that has declined in value to realize a capital loss. That loss can potentially be used to offset capital gains elsewhere in the portfolio, subject to applicable tax rules.

But tax-loss harvesting isn't simply about selling investments that have lost money.

Done thoughtfully, it can be part of a broader tax-aware investment strategy designed to manage taxes while keeping the portfolio aligned with an investor's long-term objectives.

What Is Tax-Loss Harvesting?

Tax-loss harvesting is the process of realizing a capital loss by selling an investment that has declined in value, potentially using that loss to offset capital gains.

For example, suppose an investor sells one investment and realizes a $30,000 capital gain.

Elsewhere in the portfolio, the investor owns another investment that has declined by $20,000.

If the investor sells that second investment and realizes the $20,000 loss, the loss may generally be used to offset $20,000 of the capital gain, subject to applicable tax rules.

The investor would therefore have a smaller net capital gain for tax purposes.

The important distinction is that the investment loss already exists economically. Tax-loss harvesting involves realizing that loss for tax purposes by selling the investment.

How Does Tax-Loss Harvesting Work?

A simplified tax-loss harvesting process might look like this:

1. An investment purchased for $100,000 declines to $80,000.
2. The investor sells the investment and realizes a $20,000 capital loss.
3. The investor identifies capital gains elsewhere in the taxable portfolio.
4. The realized loss may be used to offset those gains, subject to applicable tax rules.
5. The investor reinvests the proceeds into an appropriate investment so the portfolio remains aligned with its long-term strategy.

The final step is important.

Tax-loss harvesting should generally not require an investor to abandon their investment strategy.

The objective is to realize the tax loss while maintaining an appropriate portfolio.

Can Capital Losses Offset Capital Gains?

Generally, capital losses can be used to offset capital gains, subject to applicable tax rules.

For example, suppose an investor realizes:

$50,000 of long-term capital gains
$30,000 of capital losses
The $30,000 of losses could generally offset $30,000 of gains, leaving a $20,000 net capital gain.

The specific tax treatment can depend on the type and timing of the gains and losses, so investors should consider their individual tax circumstances and consult a qualified tax professional.

What Happens If Your Losses Are Greater Than Your Gains?

Sometimes an investor may realize more capital losses than capital gains during a tax year.

Under current federal tax rules, individuals who have a net capital loss after offsetting capital gains can generally deduct up to $3,000 of net capital loss against ordinary income in a year, or $1,500 if married filing separately, subject to applicable rules.

Unused capital losses can generally be carried forward to future tax years until they are used, subject to applicable tax rules.

Because tax laws can change, investors should verify the rules applicable to their situation with their tax professional.

Is Tax-Loss Harvesting the Same as Selling at a Loss?

Economically, the investor is realizing a loss.

But tax-loss harvesting is different from simply selling an investment because it has performed poorly.

The decision should begin with the investment strategy.

If an investment no longer fits the portfolio, selling it may make sense regardless of taxes.

But if the investment remains appropriate and has declined temporarily, an investor may want to realize the tax loss while maintaining similar market exposure through another investment.

This is where tax-aware investment management becomes important.

The goal isn't:

"Find something that lost money and sell it."

The goal is:

"Can we realize a tax loss while continuing to manage the portfolio appropriately?"

What Is the Wash-Sale Rule?

The wash-sale rule is an important consideration when harvesting tax losses.

Generally, the tax rules can prevent an investor from claiming a loss if they sell an investment at a loss and purchase the same or a substantially identical security within the applicable period surrounding the sale.

The rules can be complex, and the definition of "substantially identical" depends on the circumstances.

This means an investor can't necessarily sell a security at a loss on Monday and simply buy the exact same security back on Tuesday while expecting to claim the loss.

Tax-loss harvesting therefore requires careful attention to both the investment strategy and the applicable tax rules.

Investors should consult their tax professional regarding the application of the wash-sale rules to their specific circumstances.

How Can You Stay Invested While Harvesting a Loss?

One of the challenges of tax-loss harvesting is maintaining an appropriate investment exposure after selling the position.

For example, suppose an investor owns an exchange-traded fund that tracks a particular market segment and it has declined in value.

The investor may want to realize the loss but does not necessarily want to leave that area of the market entirely.

Depending on the circumstances, the investor may consider replacing it with another investment that provides appropriate but not substantially identical exposure.

This can allow the investor to maintain a desired portfolio allocation while potentially realizing the tax loss.

The specific replacement investment should be evaluated carefully, particularly in light of the wash-sale rules and the investor's overall investment strategy.

Is Tax-Loss Harvesting Worth It?

Tax-loss harvesting can provide a potential tax benefit, but it isn't automatically beneficial in every situation.

There are several factors to consider.

The size of the loss

A $2,000 loss may have a different economic impact than a $100,000 loss.

The investor's tax situation

The potential value of a harvested loss depends partly on the gains it can offset and the investor's applicable tax circumstances.

The investment being sold

An investor should consider whether the investment remains appropriate for the portfolio.

The replacement investment

The portfolio should remain appropriately positioned after the sale.

Transaction costs and other expenses

Trading costs, spreads, management fees, and other expenses can reduce the benefit.

Future tax consequences

The investment purchased after harvesting a loss may have its own future tax consequences.

Tax-loss harvesting should therefore be evaluated based on its overall economic benefit, not simply the size of the tax loss.

A Simple Tax-Loss Harvesting Example

Consider a hypothetical investor with a taxable portfolio.

During the year:

• Investment A is sold for a $60,000 capital gain.
• Investment B has declined and currently has a $40,000 unrealized loss.
• Investment B is sold, realizing the $40,000 loss.
• An appropriate replacement investment is purchased.

The $40,000 realized loss could potentially offset $40,000 of the $60,000 capital gain, leaving a $20,000 net capital gain, subject to applicable tax rules.

The investor has potentially reduced the amount of taxable gain while continuing to maintain an appropriately invested portfolio.

The actual tax savings would depend on the investor's tax circumstances.

And that's an important distinction:

A $40,000 tax loss does not mean $40,000 of tax savings.

The loss generally reduces taxable gains; it isn't a dollar-for-dollar tax credit.

Can Tax-Loss Harvesting Increase Future Taxes?

Potentially.

This is an important concept that is sometimes overlooked.

Suppose an investor sells an investment at a loss and uses the proceeds to purchase another investment.

The replacement investment may have a different cost basis.

If that investment subsequently appreciates and is eventually sold, the investor may have a larger taxable gain than they otherwise would have had.

In other words, tax-loss harvesting can sometimes defer taxes rather than permanently eliminate them.

That doesn't make the strategy ineffective.

Deferring a tax liability can have economic value because the money that otherwise might have gone toward taxes can remain invested.

But investors should evaluate tax-loss harvesting as part of a long-term strategy rather than assuming every harvested loss represents permanent tax savings.

How Does Tax-Loss Harvesting Fit Into Tax-Aware Investing?

Tax-loss harvesting is just one component of a broader tax-aware investment strategy.

Tax-aware investing can also involve:

• Selecting tax-efficient investments
• Managing portfolio turnover
• Controlling taxable distributions
• Managing unrealized gains
• Monitoring concentrated positions
• Coordinating gain and loss realization
• Evaluating cost basis
• Managing portfolio transitions
• Considering direct indexing
• Coordinating investment decisions with broader financial and tax planning

Tax-loss harvesting works best when it supports the broader investment strategy rather than driving it.

How Can Direct Indexing Create More Tax-Loss Harvesting Opportunities?

Direct indexing can be particularly relevant to tax-aware investing because it gives an investor direct ownership of individual securities rather than owning the entire portfolio through a single mutual fund or ETF.

Consider a hypothetical portfolio designed to track a broad market index.

Within that portfolio, some individual stocks may be up substantially while others may be down.

If the investor owns the individual securities directly, there may be opportunities to realize losses in certain securities while maintaining exposure to the broader market.

This can potentially create more tax-loss harvesting opportunities than would be available inside a single pooled investment.

That is one reason direct indexing can be considered by investors with sufficiently large taxable portfolios.

However, direct indexing involves costs, complexity, and other considerations and isn't appropriate for every investor.

Why Is Tax-Loss Harvesting Easier With a Larger Taxable Portfolio?

Tax-loss harvesting opportunities can vary significantly from investor to investor.

A larger taxable portfolio may contain:

• More individual securities
• More investment positions
• More unrealized gains
• More unrealized losses
• Multiple asset classes
• Multiple cost bases
• More opportunities for rebalancing

That can provide more potential opportunities to identify losses while maintaining an appropriate investment strategy.

However, portfolio size alone doesn't determine whether tax-loss harvesting makes sense.

The investor's tax situation, investment objectives, portfolio construction, and costs all matter.

When Might Tax-Loss Harvesting Not Make Sense?

Tax-loss harvesting isn't appropriate in every situation.

It may not provide much benefit when:

• There are few or no capital gains to offset 
• The potential loss is very small 
• Transaction costs outweigh the potential benefit 
• The investor would significantly disrupt the portfolio to harvest the loss 
• The replacement investment isn't appropriate 
• The tax benefit is unlikely to outweigh the economic costs 
• The investor's circumstances make the strategy unnecessary 
• The goal should never be to create losses simply because losses are available. 

The investment strategy comes first.

Tax-Loss Harvesting During a Portfolio Transition

Tax-loss harvesting can also be useful when an investor is transitioning an existing taxable portfolio.

For example, an investor may have a portfolio containing both:

• Positions with substantial unrealized gains
• Positions with unrealized losses

Rather than looking at each position independently, a transition analysis can evaluate the portfolio as a whole.

Losses may potentially be realized to offset gains elsewhere, allowing the investor to make certain portfolio changes with a smaller overall tax impact.

This is one reason tax-aware portfolio transition analysis can be valuable.

Instead of asking:

"Which investments should I sell?"

the question becomes:

"How can we move toward the desired portfolio while considering the tax consequences of the entire transition?"

Tax-Loss Harvesting Is an Ongoing Process

Tax-loss harvesting shouldn't necessarily be viewed as something that happens once at the end of the year.

Investment markets move throughout the year.

A position that has a gain today may have a loss several months later. Another investment may move in the opposite direction.

Regular monitoring can identify opportunities as they arise.

This is particularly relevant for taxable portfolios with multiple individual securities and meaningful unrealized gains and losses.

Tax-aware portfolio management therefore involves ongoing attention to:

• Gains
• Losses
• Cost basis
• Portfolio allocation
• Concentration
• Tax circumstances
• Rebalancing opportunities
• Investment changes

The objective is not to trade simply to create tax losses.

It is to remain aware of tax opportunities while managing the portfolio according to its long-term objectives.

The Bottom Line

Tax-loss harvesting can be a useful tool for investors who hold investments in taxable accounts.

It may allow investors to realize capital losses that can potentially offset capital gains, while continuing to manage the portfolio toward its long-term investment objectives.

But tax-loss harvesting isn't simply about finding investments that have lost money.

A thoughtful strategy considers:

• The investor's tax situation
• The size and type of the loss
• Existing capital gains
• Cost basis
• The investment strategy
• Replacement investments
• The wash-sale rules
• Transaction costs
• Future tax consequences

Most importantly, tax-loss harvesting should support the investment strategy rather than drive it.

At ICG, we view tax-loss harvesting as one potential component of a broader tax-aware investment approach. When appropriate, it can be incorporated into ongoing portfolio management and transition analysis to help investors consider both sides of the equation:

How can we manage the portfolio we need while being thoughtful about the taxes that portfolio may create?

This article is provided for educational and informational purposes only and is not intended to provide individualized investment, tax, or legal advice. Tax laws and regulations are subject to change. Individual circumstances vary, and investors should consult their qualified tax, legal, and financial professionals regarding their specific situation.