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Learn how tax-loss harvesting can help reduce capital gains exposure and support long-term planning strategies for high-net-worth investors.
How to Use Tax-Loss Harvesting to Potentially Offset Gains and Save Money
For high-income investors, managing tax exposure can be just as important as managing investment performance. One strategy that may help reduce taxable gains—and support long-term planning—is tax-loss harvesting.
Tax-loss harvesting involves selling investments at a loss to offset realized capital gains. While the concept may sound simple, applying it strategically requires careful coordination across portfolio design, tax timing, and overall financial goals.
Strategies in tax-loss harvesting include:
- Identifying unrealized losses to offset short- and long-term gains
- Avoiding wash-sale rule violations that could negate deductions
- Maintaining market exposure using alternative investments
- Coordinating with charitable giving or legacy planning
- Harvesting throughout the year—not just in December
What Is Tax-Loss Harvesting?
Tax-loss harvesting allows investors to sell securities at a loss and utilize those realized losses to offset realized gains elsewhere in the portfolio. This can help reduce capital gains taxes for the current year and, in some cases, carry forward losses to future years.
There are two types of capital losses:
- Short-term losses can offset short-term gains, which are typically taxed at higher ordinary income rates.
- Long-term losses can offset long-term gains, taxed at preferential rates.
How Tax-Loss Harvesting Works:
- Identify positions with unrealized losses
- Sell to realize the loss
- Offset realized capital gains
- Reinvest in a similar (not identical) asset
- Track for future opportunities
How It Works in Practice
Consider a portfolio that includes a highly appreciated stock that the investor wishes to sell for diversification or income needs. If the sale generates a significant capital gain, the investor could sell other holdings that are currently valued below their purchase price, thereby realizing losses to offset the gain.
This strategy can also be used proactively throughout the year to help manage overall tax exposure, not just at year-end.
What to Know About the Wash-Sale Rule
One of the most important rules in tax-loss harvesting is the wash-sale rule, which disallows a capital loss deduction if the investor buys the same or a “substantially identical” security within 30 days before or after the sale.
To stay compliant while maintaining exposure to the market, investors may:
- Purchase a similar—but not identical—ETF or mutual fund in the same asset class
- Temporarily shift to a broader index fund
- Stay in cash or a money market position for 31+ days (if suitable for the broader plan)
Incorporating Harvesting into a Broader Financial Strategy
Tax-loss harvesting shouldn’t happen in isolation. For high-net-worth individuals, it may intersect with other planning decisions, such as:
- Charitable giving – Harvested losses can offset gains realized when donating appreciated assets
- Roth conversions – Timing conversions in a year with high losses may reduce the tax impact
- Legacy and estate planning – Coordinating sales and gains with gifting or transfer strategies
These decisions often benefit from collaboration among your advisor, CPA, and estate planning attorney to maintain alignment across disciplines.
When Tax-Loss Harvesting May Not Make Sense
While tax-loss harvesting can be beneficial, there are circumstances where it may not be necessary, or could introduce unintended consequences:
- Low capital gains exposure – For those in lower tax brackets or with no significant gains, harvesting may offer limited benefit
- Loss of dividend income – Selling income-generating positions may interrupt cash flow
- Portfolio disruption – Poorly timed harvesting could conflict with your investment or allocation strategy
Careful planning and review can help weigh the trade-offs of realizing a loss in a given year.
Ongoing vs. Year-End Harvesting
While many investors look to harvest losses in the fourth quarter, opportunities often arise throughout the year, especially during periods of market volatility.
Benefits of harvesting periodically include:
- Smoothing out taxable gains throughout the year
- Taking advantage of temporary dips in specific sectors
- Allowing for reinvestment decisions that support overall asset allocation
Investors can work with advisors who use automated systems or regular reviews to evaluate opportunities year-round.
Tax-Loss Harvesting and Portfolio Construction
Harvesting can also inform broader portfolio design by incorporating tax sensitivity into how investments are chosen and held. For example:
- Placing tax-inefficient assets (like bonds or REITs) in retirement accounts
- Holding appreciating assets long term in taxable accounts for stepped-up basis
- Balancing gains and losses across household portfolios
These considerations are often built into a coordinated tax planning approach.
Working with a Professional Advisor
Used strategically, tax-loss harvesting can help reduce tax drag and contribute to a more tax-aware investment plan. But its impact depends on how well it's integrated with broader decisions—portfolio design, charitable giving, estate planning, and beyond.
Working with financial professionals who understand your full financial picture can help support more strategic implementation over time, turning short-term losses into long-term planning opportunities. Contact an advisor near you to start the discussion.
DISCLOSURES
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
- Hiring a qualified advisor and/or financial planner does not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
- EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
- All investment strategies have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment strategy will be suitable or profitable for a client’s portfolio. The risk of loss can never be eliminated even if working with a professional.
- An estate plan is a helpful tool that can assist individuals in managing and arranging affairs in the event of death or incapacity. However, the scope and extent of the plan varies depending on the unique circumstances and desires of the individual client. It is for this reason, that the analysis encompassed herein is not intended to be comprehensive in nature nor should it be interpreted as legal advice. Please consult a legal professional to determine the extent, scope, and the drafting and creation of the appropriate estate documents. EP Wealth Advisors is not in the business of providing legal advice or preparing legal documents. Our review is limited to and in association with Financial Planning only.
- Please consult with a CPA, tax professional, and/or attorney regarding your specific situation before implementing any of the strategies referenced directly or indirectly herein.
- Laws vary by state. The information presented herein is intended to be general in nature and may not apply to your state of domicile. Please consult local legal counsel to determine the best practices for your state.
