Turning Market Swings Into Opportunity: Understanding Tax-Loss and Tax-Gain Harvesting
Market ups and downs are a natural part of investing — but they also create opportunities for thoughtful tax planning. Two often-overlooked strategies, tax-loss harvesting and tax-gain harvesting, can help you keep more of what you earn by managing when and how you realize investment gains and losses.
Tax-Loss Harvesting: Making the Most of Market Declines
When markets fall, many investors instinctively want to sell losing investments and move on. But if done strategically, those losses can actually work in your favor.
Here’s how it works: If you sell an investment that’s worth less than what you paid for it, you can use that loss to offset realized capital gains elsewhere in your portfolio.
- Short-term losses offset short-term gains (on assets held less than one year).
- Long-term losses offset long-term gains (on assets held more than one year).
If your total losses exceed your gains, you can use up to $3,000 per year to offset ordinary income, and carry forward any remaining losses to future years.
This can be especially powerful in volatile markets — when values drop temporarily but your long-term goals haven’t changed.
A word of caution: Avoid selling solely for the tax benefit. You’ll also need to be aware of the “wash sale rule,” which prevents you from claiming a loss if you buy the same (or a substantially identical) investment within 30 days before or after the sale.
Tax-Gain Harvesting: Realizing Gains at the Right Time
While most investors try to defer taxes by delaying the sale of appreciated assets, there are times when intentionally realizing gains early can be beneficial — especially if you’re in a low-income year or expect higher income (and higher taxes) down the road.
Tax-gain harvesting means selling investments at a gain, paying little or no capital gains tax (if you’re within the 0% long-term capital gains bracket), and immediately repurchasing the investment to “reset” your cost basis higher.
Because the wash sale rule doesn’t apply to gains, you can repurchase the same security right away.
This strategy can be valuable for:
- Retirees in lower-income years before required minimum distributions begin
- Early-career investors temporarily in the 0% long-term capital gains bracket
- Investors with large carryover losses who can offset realized gains
Example: Alice and Bob each buy 10 shares of a fund for $100 each. When the fund’s price doubles to $200, Alice sells and realizes a $1,000 gain — tax-free, because she’s in the 0% capital gains bracket. She then immediately repurchases the shares at $200. Later, when the fund rises to $250 and she sells again, Alice pays tax only on the $500 gain. Bob, who didn’t harvest, pays tax on the full $1,500 gain — three times as much.
When These Strategies May Not Make Sense
Both techniques require careful analysis of your full tax picture. Realizing gains or losses can impact:
- State income taxes
- Social Security taxation
- Medicare premium surcharges
- Eligibility for certain tax credits
That’s why these decisions should be made in the context of your entire financial plan, not just your investment performance.
Bringing It All Together
Tax-loss and tax-gain harvesting can be powerful tools — but they’re not one-size-fits-all. They work best when integrated into a comprehensive, year-round tax strategy designed to minimize lifetime taxes, not just this year’s bill.
At Birch Street Financial Advisors, we help clients align their portfolios and tax decisions with what matters most — ensuring that every opportunity, even market volatility, supports their bigger financial picture.
If you’d like to review whether either strategy fits into your 2025 plan, let’s talk. We can walk through your investment and tax situation together to determine what’s right for you.
