CFP® Explains Tax Loss Harvesting and If You Should Do It in 2024?

Tax loss harvesting is a financial planning strategy that some advisors swear by, whereas others refuse to do it. Why is there such a love-hate relationship with this popular approach to investing? In this article, I’ll explain how it works, when it works and when it doesn’t, and its utility in 2024.

Tax loss harvesting can allow investors to reduce their tax burden by offsetting capital gains with capital losses. Please note, this strategy does not pertain to trading inside retirement accounts such as 401(k), IRA, 403(b), etc. The reason being is that these qualified retirement plans grow tax-deferred and are not subject to capital gains tax. Tax loss harvesting revolves around taxable investment accounts, whether they be Individual, Joint, or Transfer-On-Death.

A Refresher on Capital Gains Taxes 

Capital gains tax is levied on an asset that is sold for a gain (the difference between the amount realized from the sale and the adjusted basis of the asset). This can be a stock, bond, real estate, cryptocurrency, collectibles, and more. If the investor holds the asset for less than one year and then sells it, this short-term gain is taxed as ordinary income. This is a higher tax liability for most investors, and short-term gains have historically received less preferential treatment to deter people from rapid trading for profits rather than the long-term appreciation the economy relies on. Income tax rates in 2024 and 2025 range from 10% to 37%, depending on the tax filer’s bracket.

When an investor holds their asset for longer than one year before selling it, they are subject to long-term capital gains tax, typically less confiscatory than income tax rates. In 2024, for a Single tax filer, the long-term capital gains tax rates are 0% for those with an Adjusted Gross Income below $47,025, 15% for those with incomes between $47,026-$518,900, and 20% for those making over $518,900. The rates will remain the same in 2025, but the incomes will be indexed slightly higher for each category (i.e. $48,350; $48,351-$533,400, and over $533,400, respectively).

Additionally, some investors may be subject to the Net Investment Income Tax (NIIT) of 3.8%, often referred to as the “Medicare Tax”. In 2024, for someone filing Single, this would mean an income over $200,000, whereas Married Filing Jointly would be $250,000. To summarize, a Single filer making over $200,000 could pay up to 18.8% tax on their long-term capital gains, and those making over $518,900 could face a 23.8% tax. Investors with realized capital gains who are near these income thresholds might prepare ahead of time to reduce or avoid the NIIT by contributing to deductible retirement plans or other options that could reduce their taxable income.

It is important to remember that this short-term and long-term capital gains tax discussion pertains to “realized” capital gains. That is gains which have been realized, sold for profit or loss, thereby creating a taxable event. “Unrealized” capital gains, sometimes called “paper gains and losses”, include those fluctuating assets which have yet to be sold. It is possible to purchase a greatly appreciating stock that could hypothetically be held for decades with no taxes ever being owed until the investor decides to sell (not counting its interest or dividend income).

When to Tax Loss Harvest 

There are three scenarios in which an investor may enact this strategy. The first motive is the investor has an appreciated asset they wish to sell which is bound to trigger a tax liability, so they look to offset this gain by selling a different asset at a capital loss. It is important to note that short-term capital gains/losses offset each other first, as do long-term capital gains/losses, but after they are exhausted, any excess losses can be applied to the other category. Sometimes the investor sells their depreciated asset to invest elsewhere or spend their proceeds, they have moved on from that investment, and from a tax standpoint that is fine. But sometimes the investor is still bullish on their depreciated asset, fully expecting to get back into the investment. Here, they must be very careful of the Wash-Sale rule. This states that an investor can not deduct losses from sales or trades of stock or securities of which they then bought substantially identical stock or securities within 30 days.

Regarding the identification of short and long-term gains/losses, investors may invest in a fund or stock on an ongoing basis. This is a common result of periodic investment plans meant to dollar-cost average, or dividend reinvestment plans. They are left asking themselves if their recent sale triggers a long-term gain/loss on a stock they’ve held for years, but also just invested in last month. The answer is they can choose the best accounting method for their situation, typically First In, First Out (FIFO), which means they’ll be taxed as if the first, older, shares are sold, generating a long-term capital gain.

On the flip side, an investor may have a poorly performing holding that is depreciated which they want to unload, and so they try to get out in front of an eventual capital gains tax by selling another appreciated asset that can be offset by this loss. When the goal is to sell a loser, it’s worth noting that a winner need not be sold for the investor to realize a tax benefit. Even if there’s not an opposing capital gain, the investor is allowed to deduct up to $3,000 capital loss against their income ($1,500 if Married Filing Separately). This can be carried forward indefinitely too, so if the capital loss was $5,000, then $3,000 could be applied to this year’s tax return and $2,000 remaining available for a future year. The Wash-Sale rule does not apply to gains, meaning an investor who wants to increase their basis in an appreciated holding could sell it, offset gains with a separate loss, and buy back into the original holding.

Lastly, the investor naturally has a winner they wish to sell and a loser they wish to sell, and the offsets happen organically.

Tax loss harvesting may sound like a sound strategy that allows an investor to manage their portfolio while also mitigating taxes, and it can be, especially in the last scenario mentioned. The contrarian to tax loss harvesting may argue that an investor should do their absolute best at investing, and not let tax planning dictate their portfolio allocation and investment decisions. In other words, do not let the tax tail wag the investment dog.

As a practicing CFP®, I fall into this latter camp. I firmly believe an investor’s duty, and an advisor’s, is to maximize investment returns in line with risk tolerance and investment objectives. The fact that the Wash-Sale rule does not apply gains, does allow the investor to step-up their basis on an appreciated basis when a loss is realized and go back in without altering their strategy. But when buys and sells are enacted purely for tax planning, when they otherwise would not have been placed, especially when it involves locking in a loss on a losing investment that has the potential for a rebound, then the investor has outside influence beyond being a rational investor.

Tax Loss Harvesting in 2024 

Since tax loss harvesting can become popular in years in which the stock market has outsized gains or losses, the end of 2024 is prime for the conversation. As of this writing (11/25/2024), the S&P500 is up 26% year-to-date1. Investors who are looking to rebalance their portfolios, or simply get more conservative after two very strong years, are bound to trigger capital gains. Amid broad market rallies, some investors may not even have losses available to try tax loss harvesting. My general advice for tax loss harvesting in 2024 is no different than it is in most years, if an investor has depreciated holdings for which they no longer wish to be invested in, purely from a portfolio management perspective, then they can benefit from tax loss harvesting as a byproduct of their sells. Or, if they wish to sell a loser and move into a similar asset class that does not fall within the “substantially identical” criteria of the Wash-Sale rule, then they might be able to tax loss harvest while still holding a portfolio in line with their goals.

I consider the goal of investment management to achieve optimal returns within an appropriate risk profile, not to achieve optimal tax outcomes. While tax mitigation should affect investment management, it should not dictate it.

This article is educational in nature and should not be construed as specific financial advice. Any opinions are solely those of the author, Bryan Kuderna. Readers should consult their own tax, financial, and legal advisors to discuss tax loss harvesting as it relates to their specific financial plan.

Written by Bryan M. Kuderna.
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