Tax Loss Harvesting: What It Is and When It Makes Sense

When markets fluctuate, you may hear terms like tax loss harvesting pop up on financial news or in conversations at work. But what does it actually mean, and should you be paying attention?

At its core, tax loss harvesting is a strategy that allows you to sell investments at a loss to reduce your taxable income or offset gains elsewhere in your portfolio.

For families with significant equity compensation (like RSUs at Amazon, Microsoft, or Meta), this can be a powerful planning tool.

Let’s walk through what it is, and three common reasons why you might consider using it.

What Is Tax Loss Harvesting?

Imagine you bought a stock for $10,000. The market dips, and now it’s worth $7,000. On paper, you’ve got a $3,000 loss. If you sell that stock, you can “harvest” that loss to:

• Reduce your taxable income, or

• Offset gains from other investments.

For example, say you sold another stock that gained $10,000. Your $3,000 harvested loss reduces your taxable gain to $7,000.

It’s not about avoiding taxes forever.  It’s about lowering today’s tax bill in a smart, strategic way.

3 Reasons to Use Tax Loss Harvesting

1. Offset Taxes from Equity Compensation

If you receive stock-based pay like RSUs, each vesting event often triggers taxable income. Harvesting losses from other investments can soften that tax hit in high-income years.

2. Diversify Concentrated Stock Holdings

Many tech employees hold large portions of their wealth in company stock — sometimes 50% or more. Selling those shares often comes with hefty tax consequences. But if you harvest losses from other investments, you can diversify more efficiently and reduce the sting of taxes.

3. Maximize Savings for Family Goals

You can use up to $3,000 in harvested losses each year to reduce ordinary taxable income. Beyond that, unused losses can be carried forward to offset future gains. This flexibility can help free up dollars for college savings, estate planning, or long-term family goals

Important Caveats

Tax loss harvesting isn’t always worth it. Sometimes paying taxes now makes sense if you expect rates to rise in the future. And there are rules like the IRS wash-sale rule that can negate your harvested losses if you buy the same or “substantially identical” investment within 30 days.

That’s why it’s critical to coordinate between your financial advisor and your CPA before making moves. This strategy works best when it aligns with your overall financial plan.

Final Thoughts

Tax loss harvesting is not about gaming the system.  It’s about being intentional with your investments and taxes. For families with equity compensation, concentrated stock, or large future goals, it can be one of many tools to make your money work harder for you.  (Make sure you incorporate your CPA)

🎧 Want to go deeper? Listen to the full episode of the Beer and Money Podcast here: Beer and Money

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If you’re wondering whether this strategy fits your situation, reach out. We help families think through these trade-offs every day and build plans that balance taxes, cash flow, and long-term security.

Cheers,

Ryan