As Trump appeared to be determined to ruin the U.S. economy, if not the economic prosperity of the entire world, the least I can do is share a valuable tax planning strategy with you, to help at least get some benefit out of the chaos. Now is the time to do some strategic tax-loss harvesting to lower your taxes for 2025. The goal of tax-loss harvesting is to reduce both your taxes on investments as well as your overall taxes. Taking this proactive tax-planning move, you may be able to lower your taxable income by selling off assets that are worth less than what you paid for them. Similarly, you can offset some long-term gains taxes by selling investments that may have lost money over the long term. In this post, we will share with you what you need to lower your 2025 taxes with tax-loss harvesting.

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

Shouldn’t You Buy Low and Sell High?

Ultimately, the goal of investing is to buy low and sell high. This simple investing rule may be easier said than done. Even within a portfolio that has done amazingly well over time, a few investments may have lost money. Or perhaps, just a few shares of an investment, purchased at different times, may have lost money. 

Tax-loss harvesting has been around forever, but it has only recently come to the attention of investors who are not super-wealthy. Technology and reduced (or eliminated) trading costs have made this tax-minimization strategy much easier to implement, as well as much less time-consuming and costly. Bottom line, who doesn’t like saving money on taxes? Granted, the bigger your taxable investment account or the higher your income, the bigger the tax savings may be when implementing tax-loss harvesting in your portfolio in 2025.

Extra credit if you live in California, with sky-high capital gains rates at the state level, tax loss harvesting is even more valuable for California residents.

Why Bother With Tax-Loss Harvesting?

Tax-loss harvesting amounts to selling specific investments to minimize the taxes on your overall investment portfolio. In the simplest terms, tax harvesting is more about taxes than investing.

When using tax-loss harvesting strategies in real life, it is a bit more complicated than the aforementioned description. You can harvest both short-term losses as well as long-term losses. Depending on your personal tax situation, one may be way more valuable than the other.

When tax-loss harvesting, we are selling certain shares of an investment at a loss to reduce taxes on the investment portfolio at the end of the year. You can use up to $3,000 of short-term losses to offset regular income. If you are selling an investment with a long-term capital loss, those losses can help offset the capital gains from other investments that have been sold for a profit.

Can I Use Tax-Loss Harvesting in Retirement Accounts?

Buying and selling of investments within your retirement accounts are not taxable events. With that in mind, there is no need and no benefit from tax-loss-harvesting within a retirement account.

Example Of Tax-Loss Harvesting To Save On Taxes

Let’s say that you have $200,000 in realized capital gains on certain index funds within your investment account. The stock markets had been reaching record highs until just after Donadl Trump was inaugurated for his second term. We had been in a bull market for over a decade. Even after the recent stock market correction due to the Liberation Day announcement, many long-term investors are likely sitting on some huge capital gains. To minimize the taxes from those gains, you sell other assets that will help generate a loss. If those losses total $100,000, they will cut your net capital gains taxes in half. With half the realized capital gains, you will have half the tax liability for those gains. We will dig a little deeper into how this actually works later in this post.

Is Tax-loss Harvesting Really That Easy?

Sadly, tax-loss harvesting is not all that easy in practice. Trying to manually harvest tax losses can actually be quite complicated and labor-intensive. Back in the day, this had to be done with Excel spreadsheets. Blah. Now, the process of tax planning is much easier, as much of the heavy lifting can be done with computers and software and handled by your amazing financial advisor (hopefully, you have one).

On the other hand, if your financial advisor is not an idiot, they should have your accounts set up to run as tax-efficiently as possible. Tax-loss harvesting is a little extra work for the advisor, but the tax savings for you can be huge. 

What You Need to Know About Wash Sales

Tax-loss harvesting is all about saving on taxes, not so much about investing. So, on some occasions, you may want to just temporarily sell some portion of an investment holding to take a tax loss now, with the goal of rebuying the same investment in the future. When tax-loss harvesting is not done properly, it will create a wash-sale that will eliminate the tax benefits of buying and selling.

This wash sale rule was a way for the IRS to prevent taxpayers from creating tax losses using investment in the extreme short term. The wash sale rule requires that a loss on a sale will not be given if the same, or substantially identical, security is purchased again within 30 days of the original sale that resulted in the loss.

That means either 30 days before or 30 days after the sale. For example, you can buy 1,000 shares of a fund on January 1^st, followed by a sale of 1,000 shares of the fund that you already owned, which had a loss on January 2^nd. This will result in a wash sale, and any losses will be disallowed.

Avoiding wash sales and finding the best shares to sell can get quite cumbersome when you have multiple holdings in your portfolio. With the help of software, a fiduciary financial planner, like myself, can do tax-loss harvesting for all clients. In the past, a firm may have required a full-time employee to solely dedicated to handling this type of thing.

The best way to get around the wash sales rule is to make sure that you wait at least 31 days after the sale of an investment before you buy it again. (Assuming you buy it back at all). Another option is to purchase a similar, but not identical, investment to the one that sold. This could involve, say, selling bank stocks and buying shares in a banking fund immediately after. Or perhaps, you move from one index fund to a slightly different index fund.

Tax Harvesting Short-Term and Long-Term Losses

You can tax harvest both short-term and long-term losses. Short-term losses are on an investment held less than a year. Long-term losses are for investments held longer than a year. Long-term capital gains are typically taxed at a much lower rate than short-term gains. Short-term gains are typically taxed like regular income. With that in mind, short-term harvesting losses are more valuable in general than long-term losses when tax-loss harvesting.

Hopefully, by now, you have gathered that the primary reason to partake in tax harvesting is to defer taxes.  Paying fewer taxes now will help allow your investments to compound and grow exponentially well into the future. 

How Valuable is Tax-Loss Harvesting?

When done right, tax-loss harvesting can have a positive effect on your net after-tax investment returns. The great thing here is that you can potentially earn better investment returns without having to take on any more investment risk. 

How valuable tax-loss harvesting is for you, personally, will likely depend on the size of your accounts, as well as your income-tax brackets. Likewise, the benefits of tax-loss harvesting will vary from year to year. With Donald Trump helping the stock market drop over 20% recently, the benefits of tax harvesting could be HUGE.

Various studies and whitepapers have attempted to estimate the value of tax-loss harvesting. The estimates mostly put the value of tax-loss harvesting somewhere between 0.50% and 2.54% averaged, per year, over the long term. The value to you in any given year will likely vary. Even at the low end of this range, the benefits of your investment returns can be substantial.

While you may be thinking, great, one more thing to worry about, this doesn’t have to add stress to your life. Talk to your financial advisor. Hopefully, he or she is already taking care of this for you. If not, you have some great opportunities to pay less in taxes this year. If you ask me, paying less in taxes is worth a bit of hassle. Granted, I’m a total money nerd and truly love all this stuff.

DAVID RAE, CFP®, AIF®  is a Wealth Manager in Los Angeles with DRM Wealth Management, a regular contributor to the Advocate Magazine and other fine publications, and a financial planner proudly serving friends of the LGBT community for over a decade. He regularly appears as a Financial Expert on CBS, ABC and KTLA News. Too old to be a millennial, too young to be an average (aka boring) financial adviser.  David is also currently a contributor to FORBES.COM

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