Turning Market Losses into Potential Tax Savings

September 5, 2025

No investor likes to see red in their portfolio, but sometimes a down investment can still serve a purpose. Through a strategy called tax-loss harvesting, you may be able to turn paper losses into meaningful tax benefits—helping reduce your tax bill today and potentially in future years.

What Is Tax-Loss Harvesting?

At its core, tax-loss harvesting involves selling investments that have dropped in value, then reinvesting in similar (but not identical) assets. By doing so, you realize a loss that can be used to:

●     Offset capital gains from other investments

●     Reduce up to $3,000 of ordinary income each year ($1,500 if married filing separately)

●     Carry forward unused losses to future tax years

The net effect: more of your money stays invested and working for you, rather than going to the IRS.

Why It Matters in Volatile Markets

Market swings often create opportunities to harvest losses. As one portfolio manager put it, losses can act like deposits into a “tax savings account” that may shield gains for years to come.

Even if you don’t have gains to offset this year, harvesting losses can set you up for potential tax savings down the road.

Short-Term vs. Long-Term Gains

Not all gains—and not all losses—are created equal:

●     Short-term gains (from investments held one year or less) are taxed as ordinary income, at rates up to 37% federally (or higher when additional taxes apply).

●     Long-term gains (from investments held more than a year) benefit from lower capital gains tax rates, generally 0%–20%.

Since short-term gains are taxed more heavily, offsetting them with harvested losses can often deliver the biggest benefit.

Watch Out for Wash Sales

One important caveat: the IRS wash-sale rule. If you sell an investment at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, you lose the ability to claim that loss for tax purposes.

To stay invested while avoiding this pitfall, investors sometimes replace a sold stock with a sector ETF, or swap one fund for another with a similar—but not identical—strategy.

(Note: Current rules don’t apply wash-sale restrictions to cryptocurrency transactions, though proposed legislation could close this gap. Always check with a tax professional before acting.)

Other Considerations

●     Mutual funds can distribute capital gains, both long- and short-term, which harvested losses may help offset.

●     Rebalancing your portfolio can be a natural opportunity to harvest losses while keeping your investments aligned with long-term goals.

●     Employer stock awards may benefit from careful planning—harvesting losses before new stock vests can help prevent over-concentration in company shares.

●     Cost basis methods matter. Using specific-lot identification instead of average cost can allow you to choose higher-cost shares to sell, maximizing the loss you can claim.

Keep the Bigger Picture in Mind

While tax-loss harvesting can be a powerful tool, it’s not a strategy to chase blindly. The old saying applies: “Don’t let the tax tail wag the investment dog.” Your primary focus should remain on building a portfolio that supports your long-term financial goals. Tax benefits are an added advantage—not the main driver.

Final Thoughts

Tax-loss harvesting can be a valuable strategy, especially in volatile markets. But it’s also complex, with important rules and exceptions to keep in mind.

If you’re interested in exploring how tax-loss harvesting could fit into your financial plan, we recommend consulting a tax advisor or working with a financial professional who integrates tax-smart strategies into portfolio management.

Sources:

https://www.fidelity.com/viewpoints/personal-finance/tax-loss-harvesting

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.