The color red gets such a bad rep. Studies show that seeing red can increase your heart rate, blood pressure, and respiration rate, acting as an evolutionary danger signal. So, it’s no wonder that when your stock portfolio is down or “in the red,” you feel anxious and think something is wrong.
In investing, red doesn’t always mean failure. Sometimes it’s opportunity. One of the most powerful ways to turn losses into strategy is through Tax-Loss Harvesting (TLH).
The concept is simple: when you sell an investment at a loss, that loss becomes “realized.” Realized losses can significantly reduce the taxes you owe on profits from investments sold at a gain. If your losses are bigger than your gains, you can even use up to $3,000 a year to reduce your regular income taxes, and carry the rest forward into future years.
The beauty of TLH is that losses are universal currency in the tax world, meaning they can offset gains from virtually any asset. This includes stocks, crypto, ETFs, and even real estate.
Here’s a quick real world example:
Imagine you sell Stock A for a $15,000 profit this year. Normally, that entire gain is taxable. But if you also sell Stock B at a $10,000 loss, the net result leaves you with only $5,000 of taxable gains. Assuming a tax rate of 22%, this move will save you approximately $2,200 in taxes.
When the whole year is red
Sometimes you don’t have any gains at all, leaving your entire year in the red. Even then, harvesting losses can work in your favor by reducing your ordinary income.
For example: Jordan realizes $6,000 in losses this year. With no gains to offset, $3,000 of that loss is applied directly against his taxable income, saving him hundreds of dollars immediately. The remaining $3,000 automatically carries forward to offset gains in future years. Not a bad outcome for a year that felt like nothing went right.
Taking TLH up a level
Now that you understand the basics, let’s take it one step further. Selling a stock (or any security) removes you from the market. In investing, that’s as close as you get to a cardinal sin, because every day out of the market is a missed opportunity for growth.
So what happens if you’re facing a sizable tax bill near year-end and could use that $3,000 offset? Maybe you hold a position that hasn’t performed well. You still believe in the broader theme, but the stock just isn’t working right now. This is where TLH becomes strategic.
Let’s assume the losing position is Apple. One approach is to sell Apple, then immediately replace it with a diversified tech ETF like QQQ or a strong individual peer such as Microsoft.
This allows you to realize the $3,000 loss and apply it against your ordinary income, while still keeping you invested in the same general space. This way you don’t miss a market rebound.
You might ask, why not just sell Apple and buy it right back? Because of the Wash-Sale Rule. If you sell a stock at a loss, you cannot repurchase the same or a “substantially identical” security within 30 days (before or after the sale). If you do, the IRS wipes out the tax benefit. That’s why you rotate into something similar, not identical, so your portfolio stays aligned with your strategy while the tax benefit stays intact.
Ultimately, the tax tail shouldn’t wag the investment dog. Tax-loss harvesting is about lowering taxes, upgrading the quality of your portfolio, and keeping more capital working for you over time. When applied thoughtfully, it squeezes real financial value out of a losing position. As we close out the year, it’s worth sitting down with your advisor and CPA to identify opportunities where TLH can improve your after-tax return and lighten your tax bill. If you want another set of eyes or help identifying those opportunities, reach out to me and I’d be happy to walk through it with you.
Ken Johnson, CFA | Wall Street taught me the numbers. My community taught me the culture. InvestorBloc is where the two come together so you can build wealth in a way that feels authentic and attainable.