Strategic Tax-Loss Harvesting: Turn Market Volatility Into Savings

As we move through August 2025, market volatility continues to create both challenges and opportunities for savvy taxpayers. While no one enjoys seeing their investments decline, these downturns present a valuable silver lining: tax-loss harvesting.

What Is Tax-Loss Harvesting?

Tax-loss harvesting involves selling investments at a loss to offset capital gains and reduce your tax liability. You can then reinvest in similar (but not "substantially identical") securities to maintain your market exposure while capturing the tax benefit.

How It Works

Capital losses first offset capital gains dollar-for-dollar. Short-term losses offset short-term gains (taxed at ordinary income rates), and long-term losses offset long-term gains (taxed at preferential rates). If losses exceed gains, you can deduct up to $3,000 of net losses against ordinary income, with remaining losses carried forward indefinitely.

The Wash Sale Rule

The IRS wash sale rule disallows a loss if you purchase "substantially identical" securities within 30 days before or after the sale. For stocks, this means you can't sell and immediately repurchase the same company's shares. However, you can purchase similar securities—a different company in the same sector, or a sector ETF—to maintain your investment position.

Cryptocurrency Exception

Currently, cryptocurrency isn't subject to wash sale rules under IRS guidance, though this may change. Confirm current rules with your CPA before harvesting crypto losses.

Strategic Considerations

Don't let the tax tail wag the investment dog. Tax-loss harvesting should complement, not drive, your investment strategy. Consider transaction costs, your overall portfolio allocation, and the value of the tax benefit relative to any portfolio disruption.

Year-end isn't the only time to harvest losses. Systematic review throughout the year can capture opportunities that might recover before December.