The following column was contributed by Chad Slate. 

Tax loss harvesting is a strategy often mentioned in investment and financial planning conversations, but many investors aren’t entirely sure what it means, or how it works. In this article, we’ll walk through the basics of tax loss harvesting and explain how it may fit into a broader investment strategy. 

In the world of investing, market downturns are inevitable, but they may present an opportunity for savvy investors in non-qualified (taxable) portfolios. Unlike retirement accounts such as IRAs or 401(k)s, where gains grow tax-deferred, taxable brokerage accounts trigger taxes on dividends, interest, and realized capital gains each year. This is where tax-loss harvesting shines, it can be a strategy to turn paper losses into tax savings. 

How Does Tax Loss Harvesting Work? 

Tax-loss harvesting involves selling investments that have declined in value to realize a capital loss. These losses can offset capital gains from other sales, reducing your tax bill. If losses exceed gains, up to $3,000 can offset ordinary income annually (at rates up to 37%), with excess carried forward indefinitely.  

The proceeds are then reinvested into a similar—but not identical—fund or ETF within the same asset class. This allows your portfolio to remain invested while capturing a loss that may help offset capital gains elsewhere.  

This approach is particularly effective with exchange-traded funds (ETFs) and mutual funds, common holdings in taxable accounts. ETFs often provide more harvesting opportunities due to their structure and variety, while mutual funds can generate losses from underperformance or year-end distributions. 

A Tax Loss Harvesting Example 

(Hypothetical example for illustrative purposes only) 

1. Suppose you purchased 100 shares of an S&P 500 ETF at $250 per share, for a total investment of $25,000. After a market decline, the value of the investment falls to $200 per share, reducing the position to $20,000. This represents an unrealized loss of $5,000. 
2. At the same time, you sold another investment earlier in the year and realized a $8,000 long-term capital gain. 
3. To harvest the loss, you sell the S&P 500 ETF and realize the $5,000 capital loss. This loss can be used to offset part of your $8,000 gain, leaving $3,000 of taxable gain. 
4. If the gain is taxed at 15%, your tax bill would be $450 instead of $1,200, resulting in $750 in tax savings. 
5. To remain invested in U.S. stocks and avoid triggering a wash sale, you could reinvest the proceeds into a different ETF that tracks a similar—but not identical—index, such as a broad U.S. stock market fund. 

• Capture a tax loss 

• Maintain market exposure 

• Continue participating if the market recovers 

While the loss appears on your tax return, your portfolio remains invested throughout the process. Of course, as with many tax strategies, there are important rules and considerations to keep in mind. 

Understanding the Wash Sale Rule 

The IRS's wash sale rule is crucial: If you sell a security at a loss and buy a "substantially identical" one within 30 days before or after (a 61-day window), the loss is disallowed. The disallowed loss adjusts the cost basis of the new shares upward. 

For mutual funds and ETFs, "substantially identical" isn't strictly defined, but switching between funds tracking different indexes (e.g., S&P 500 vs. total market) or from different providers is generally safe. High overlap or identical indexes may risk violation, though the IRS has no ruling on many ETF pairs. 

Tax Loss Harvesting Best Practices for 2026 

Tax-loss harvesting works best when it is approached as part of a disciplined, year-round investment strategy, not just a year-end tax exercise. Because market volatility can occur at any time, monitoring portfolios regularly may create opportunities to realize losses that could help offset gains elsewhere in the portfolio. 

Investors should also be mindful of the wash sale rule and other tax considerations when implementing this strategy. Many investors favor ETFs in taxable portfolios because they often provide greater tax efficiency and flexibility when replacing investments while maintaining market exposure. As always, tax strategies should be coordinated with a qualified tax professional, since rules can apply across accounts and individual circumstances vary. Tax-loss harvesting doesn't eliminate taxes entirely. Instead, it may help defer and reduce them, which can potentially boost after-tax investment outcomes. When used thoughtfully within a broader financial plan, it can be a valuable way to make periods of market volatility work in an investor’s favor.  

Have Questions About Tax-Aware Investing? 

If you have questions about how tax-loss harvesting may fit into your overall financial strategy, consider discussing it with your financial advisor. 

If you don’t have an advisor or would like a second opinion on your investment strategy, our team at Pathfinder Wealth Consulting would be happy to have a conversation and explore whether a thoughtful, tax-aware planning approach may benefit you. 

Contact us today to learn more about how disciplined investment and tax planning can support your long-term goals. 

This material is intended for informational and educational purposes only and should not be construed as specific investment, tax, or legal advice. Tax laws are subject to change and may vary depending on individual circumstances and state of residence. Hypothetical examples do not represent the experience of any specific client. Investment involves risk, including the possible loss of principal. Please consult with a qualified tax professional regarding your specific situation before making any financial decisions. To learn more about how we work with clients and our fiduciary commitments to you, view our Form CRS Client Relationship Summary.