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Tax strategy advice seems to be everywhere, but most of it only provides a snapshot rather than the full picture. This makes it hard to know which strategies are actually worth your time. Tax-loss harvesting is worth your time.

What Is Tax-Loss Harvesting?

Tax-loss harvesting means selling an investment that has dropped below what you paid for it, intentionally, to capture a tax benefit. You use that realized loss to offset capital gains elsewhere in your portfolio, reducing the amount of income you owe taxes on. You then reinvest the proceeds into something similar but not identical, so your portfolio stays on track.

For high-income earners, this can be especially valuable. Long-term capital gains are taxed at up to 20% federally, plus an additional 3.8% Net Investment Income Tax (NIIT) for those above the income threshold, bringing the effective top federal rate to 23.8%. Stack on state taxes in places like California or New York, and your combined rate on gains can reach 35% or more. Every dollar offset by a harvested loss is a dollar you do not pay that rate on.

How It Works

Losses offset gains dollar-for-dollar. If your total losses exceed your gains for the year, you can deduct up to $3,000 against ordinary income and carry any remainder forward to future years indefinitely.

The key rule to know is the wash-sale rule: the IRS disallows a loss if you buy the same or a substantially identical security within 30 days before or after the sale. The fix is to swap into something similar but distinct. For example, if you sell an S&P 500 index fund, reinvest in a total market or Russell 1000 fund. Be conservative here; swapping between two funds tracking the exact same index is risky. The rule also applies across all your accounts, including IRAs, so coordinate carefully.

One more limit: this only works in taxable brokerage accounts. Losses inside an IRA or 401(k) do not generate a deductible loss.

Real-World Example

Dr. Michelle, Medical Consultant in Chicago

Michelle is an independent medical consultant earning $700,000 a year, advising hospitals and health systems on operational strategy. She has built a solid investment portfolio over the years, but like most investors, not every position has gone her way.

This past year, Michelle decided to sell shares of a pharmaceutical company she had held for three years, locking in a $40,000 long-term capital gain. Around the same time, a medical device ETF she purchased eighteen months earlier had fallen from $55,000 to $34,000, a $21,000 unrealized loss. The sector had underperformed her expectations and she was ready to move on.

Her financial advisor suggested harvesting the loss before selling the pharma shares. Michelle sold the medical device ETF and immediately reinvested the proceeds into a broader healthcare index fund, which was different enough to satisfy the wash-sale rule while keeping her exposure to the sector she knows well. She then applied the $21,000 loss against her $40,000 gain, reducing her net taxable gain to $19,000.

Without harvesting: $40,000 taxable gain. Federal tax at 23.8% = $9,520. Illinois state tax at 4.95% = $1,980. Estimated total: $11,500.

With harvesting: $19,000 net taxable gain. Federal = $4,522. Illinois = $941. Estimated total: $5,463.

Estimated tax savings: $6,037.

By acting on a loss she was already planning to exit, Michelle kept over $6,000 working in her portfolio instead of sending it to the IRS, without changing her long-term investment strategy at all.

Practical Tips

Review quarterly, not just in December. The best opportunities appear throughout the year, and losses that exist in September may have recovered by year-end. Set a threshold, as most advisors suggest a minimum of $3,000 to $5,000 per position, so transaction costs do not eat your savings. Use specific-lot accounting to sell your highest-cost shares first and maximize the loss you capture. And coordinate with your CPA: large gains from equity comp, real estate, or a business sale can create ideal harvesting opportunities if you time them together.

One important mindset check: harvesting defers taxes, it does not eliminate them. When you sell the replacement position down the road, you will owe taxes on that gain. The real benefit is keeping money invested and compounding today rather than sending it to the government now. 

The Bottom Line

Tax-loss harvesting is one of the most practical tools available to high-income investors. The idea is simple: when the market gives you losses, use them. Offset your gains, reduce your bill, and stay invested. The strategy works best when it becomes a regular habit built into how you manage your portfolio year-round, not a last-minute scramble each December.

This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional or financial advisor to assess your specific circumstances.