Every year, investors face the same surprising reality: you can owe taxes even if some of your investments lost money. How? Because when one investment is sold at a gain, that profit can be taxable—even if another investment was sold at a loss.
It feels counterintuitive. After all, if you made $5,000 on one stock but lost $5,000 on another, shouldn’t it balance out? Not always, unless you know how to use a strategy the IRS actually allows: tax-loss harvesting.
Think of it as turning lemons into lemonade—but for your portfolio. By intentionally selling investments that have dropped below the price you paid, you can use those losses to offset taxable gains.
Why This Matters Now
Tax-loss harvesting isn’t just about this year’s gains. It can also position you for smart moves down the road. Here are three ways investors often put it to use:
Offset realized gains:
If you sold a stock earlier this year for a profit, you may owe taxes on that gain. But if you also sell another investment for less than you paid, the two can cancel each other out for tax purposes.
Prepare for future conversions
Planning to convert part of a traditional IRA into a Roth IRA in the coming years? That move increases taxable income. Strategic losses harvested today may help soften the impact when that conversion happens.
Enhance charitable giving strategies
Some investors pair tax-loss harvesting with charitable donations. For instance, they might sell a losing investment for a tax benefit, then donate appreciated investments to a donor-advised fund, stacking two tax advantages together.
Looking Ahead
April’s tax season may feel far away, but some opportunities disappear once the year ends. The months leading up to December 31 can be a window to review your investments and see whether strategies like tax-loss harvesting make sense for you.
Could today’s dip be your chance to turn temporary losses into a long-term advantage?
If you’d like to explore what this might look like for your portfolio, consider scheduling a complimentary meeting to review your situation.
Source:
Internal Revenue Service. “Topic no. 409 Capital Gains and Losses.” IRS.gov, 2024, https://www.irs.gov/taxtopics/tc409
Roth accounts require the owner to be 59.5 years old and have had the account open for 5 years to take penalty-free withdrawals. Converting an employer plan account to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences, including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or protect against losses. This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues. We do not provide tax or legal advice or services. Always consult with qualified tax and legal advisors concerning your own circumstances.
