10 Tips for Harvesting Investment Losses

Robert Brokamp (0:03)

Turning investment losses into tax benefits, this week on the Saturday Personal Finance Edition of the Motley Fool Hidden Gems Investing Podcast.

I'm Robert Brokamp, and somewhere in your portfolio, you probably have a loser, an investment that is now worth less than what you paid for it. However, all is not lost. If that investment is in a non-retirement account, you know, not in an IRA or 4K or even an HSA, you can sell it, take the loss, and use it to reduce your taxable income. With a market near all-time highs, you may wonder how many losses investors have, but you likely have a few duds in your portfolio. Despite the S&P 500 being near an all-time high, approximately 200 of the stocks in the index are in the red for 2026, and around 40 of the stocks in the NASDAQ 100 are underwater so far this year. Three of the 11 standard and poor sectors have lost money over the trailing 12 months, those three being consumer discretionary, communication services and utilities, though that last one only barely in a loss.

Even if you don't have losses in your taxable accounts, there are ways to be a tax smarter seller, perhaps even intentionally realizing some gains this year or passing them on to heirs or charities. So here are 10 tips for making the most of your losses and managing gains. Tip number one, tax loss selling isn't just for stocks. Any stock, bond, mutual fund, ETF or options contract that is below the price you paid can feel the wrath of your harvesting. Consider that the Vanguard Total Bond Market ETF, the biggest bond ETF in the world, is still down more than 20 percent from its 2020 peak. So don't limit your search to just individual stocks. You can also do some tax loss harvesting with your crypto, but the rules can be different and in some cases actually more favorable. But I won't be touching on those in this episode, so if you'll be selling your crypto at a loss, do additional research. I'll also add that unfortunately you cannot claim taxable loss on property held for personal use, such as a house.

Step number two, match short and long-term gains and losses. So when you fill out your Schedule D and your tax return, you'll be required to categorize your sales as short-term. Those are investments held for a year or less, or long-term held for longer than a year. You'll start by offsetting the short-term gains or the short-term losses, and then the long-term gains with the long-term losses, and then whatever gains or losses are left over after that process offset each other, with any remaining losses reducing taxable income up to $3,000 per year, $1,500 if you're married and filing taxes separately. Excess losses can be carried forward to subsequent years. By the way, that $3,000 deduction can be valuable. Some deductions lower your tax bill, but not your AGI such as itemized deductions. But a capital loss does lower your AGI, AGI standing for adjusted gross income, and your AGI can affect various aspects of your finances, such as your ability to take other deductions and credits, whether you can contribute to a Roth IRA, how much you may pay for health care through the ACA or Medicare, and maybe your eligibility for college financial aid. So if your AGI is just a bit over a threshold that has a negative impact on your finances, taking a capital loss in excess of capital gains could be a solution.

And as you consider which losses to recognize and how much, keep in mind that short-term gains are taxed at the same rate as ordinary income and that rate is higher than the tax rate at long-term capital gains. So it's generally better to use losses to offset short-term gains and ordinary income over long-term gains if possible. Number three, sell now, but wait before buying back. So if you decide to sell an investment to take a loss on your tax return, don't buy it back within 30 days of the sale date. Otherwise, the loss is considered a wash sale, a loss that violates the wash sale rule will be disallowed. In other words, you can't enter it as a loss on Schedule D to offset your gains or your income.

If you lose your calendar and accidentally buy the investment back within 30 days, the disallowed loss is added to the cost basis. The 30 day clock starts the day after the sale, and we're talking calendar days, not trading days. Of course, if you have no intention of buying back the investment, then you don't have to worry about all this wash sale hullabaloo.