Why tax-loss harvesting matters for high-income investors
High-income individuals face a distinct tax environment: higher long-term capital gains rates at the top brackets plus the 3.8% Net Investment Income Tax (NIIT) on investment income above MAGI thresholds (typically $200,000 single / $250,000 married filing jointly). That combination magnifies the value of every dollar of capital-loss sheltering.
When done correctly, tax-loss harvesting reduces current-year taxable gains, lowers effective tax rates on portfolio returns and can strategically move taxable income across years. The strategy becomes materially more valuable as marginal tax rates and NIIT exposure rise.
(IRS guidance: see Topic No. 409 on capital gains and losses and Publication 550 for rules on wash sales and capital gains/loss treatment.)
Sources: IRS Topic No. 409; IRS Publication 550; Form 8949 (IRS)
How tax-loss harvesting works (mechanics you must master)
- Realize a loss: Sell an asset for less than your cost basis. That creates a realized capital loss reported on Form 8949 and Schedule D (see Form 8949 guidance).
- Net gains and losses: Short-term losses first offset short-term gains, long-term losses offset long-term gains; after netting, an overall net capital loss can offset ordinary income up to $3,000 per year with the remainder carried forward indefinitely.
- Carryforward: Excess losses carry forward and can be used in future years to offset gains or up to $3,000 of ordinary income annually.
- Reporting: Record each sale (date, proceeds, basis, gain/loss) and report on Form 8949 and Schedule D.
Practical note from my practice: high-income clients often have many discrete taxable events (option exercises, business sales, concentrated equity dispositions). Tracking tax lots and documenting basis is critical to ensure you can realize the loss you expect.
Advanced techniques for high-income individuals
1) Tax-lot selection (specific identification)
Specific identification of lots is one of the highest-leverage tactics. Instead of the default FIFO accounting, direct your broker to sell the tax lots with the highest cost basis or the lots that generate the most favorable holding-period mix.
- Why it helps: You can convert what would be a short-term gain into a long-term gain or selectively harvest losses when you need them. This requires good recordkeeping and timely instruction to your custodian.
See related guide: Tax Planning — Harvesting Losses Across Tax Lots (internal).
2) Pair loss harvesting with tax-gain timing
In years where your income is lower (or when you can push income into a low-tax window), consider harvesting gains to reset cost basis and then use harvested losses in higher-income years. For high-income investors, coordinating gains and losses across adjacent years can reduce the combined tax bill.
3) Keep market exposure while avoiding wash sales
To realize a loss without losing market exposure, sell the security and buy a similar—but not “substantially identical”—instrument. For example:
- Sell VOO (Vanguard S&P 500 ETF) and buy an S&P 500 mutual fund from a different family, or an ETF that tracks a similar but not identical index.
Avoid buying the same or substantially identical security within 30 days before or after the sale — that triggers the wash-sale rule and disallows the loss. The wash-sale rule also applies across accounts and to purchases in IRAs (IRS warns that repurchasing a sold security inside an IRA can permanently disallow the loss).
For specifics, see our internal page: Wash-Sale Rule (internal).
4) Harvest across multiple accounts, carefully
Losses realized in taxable accounts are the ones available to offset gains; they do not reduce tax inside IRAs or 401(k)s. However, purchases in retirement accounts can still create wash-sale issues. Coordinate trades across taxable accounts, IRAs and spouse accounts.
5) Use ETFs or tax-efficient replacement securities
When you need to remain invested during the 30-day window, use broad ETFs that are not substantially identical, or employ inverse/higher-frequency ETFs sparingly. Another option is a short-term Treasury or money-market sweep until the wash-sale window has passed.
6) Harvesting in concentrated positions
For executives or founders with a concentrated equity position, partial liquidation paired with options or collars can lock in downside protection while preserving upside. Consider using tax-loss harvesting in tandem with a planned diversification/exit strategy to avoid knee-jerk sales.
7) Coordinate with AMT/NIIT planning
While the 2017 Tax Cuts and Jobs Act changed AMT exposure for most taxpayers, NIIT remains a relevant surcharge. Harvesting losses in years when a sale would otherwise push you above the NIIT threshold can have outsized benefits. Model both the ordinary capital gains rate and the 3.8% NIIT in your scenarios.
Common pitfalls and how to avoid them
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Wash-sales across accounts: Remember the 30-day rule applies across all your accounts and even involves purchases in IRAs — a mistake I have seen can convert an otherwise helpful loss into a permanently disallowed tax deduction (IRS Publication 550).
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“Substantially identical” ambiguity: The IRS doesn’t supply a clear definition. Steer toward funds with different managers or tracking methodologies when in doubt.
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Over-harvesting for tax reasons only: Realize losses that make sense for your portfolio’s risk profile. Tax savings that leave you off your long-term plan are counterproductive.
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Failing to track cost basis correctly: Brokerage basis reporting varies by account type and vintage. Keep documentation and reconcile Form 1099-B to Form 8949.
Example calculations (simple)
Example 1 — Direct offset
- Realized long-term gain: $50,000
- Harvested long-term losses: $20,000
- Net taxable gain: $30,000
- Tax effect (top combined long-term rate + NIIT ≈ 23.8%): tax saved ≈ $20,000 * 23.8% = $4,760
Example 2 — Carryforward
- Realized gains in Year 1: $10,000
- Harvested losses in Year 1: $0 => net gain $10,000 taxed
- Harvested losses in Year 2: $15,000 => you can offset Year 2 gains and carry forward excess to Year 3 (or use up to $3,000 vs ordinary income each year until exhausted).
Note: Use precise marginal rates that apply to your filing status and tax year. The NIIT is applied to the lesser of net investment income or excess AGI above the statutory thresholds.
Workflow and checklist for a high-income taxpayer
- Maintain real-time tax-lot level records across brokers.
- Monitor realized gains events (option exercises, company liquidity events, scheduled sales).
- Run a mid-year and pre-year-end tax-loss harvesting screen with your advisor.
- Use specific-lot sell instructions where advantageous.
- Avoid repurchasing substantially identical holdings within 30 days across any account.
- Document transactions for Form 8949 and Schedule D reporting.
- Revisit plan after major life events (sale of business, inheritance, retirement).
My practice experience (practical notes)
In my work with high-net-worth clients, the highest-value outcomes come from integrating tax-loss harvesting into the broader financial plan rather than treating it as a year-end checkbox. A coordinated strategy that includes tax-aware rebalancing, gifting appreciated assets to family members in lower brackets, and timing major sales around low-income years tends to produce bigger lifetime tax savings than ad hoc harvesting.
A cautionary tale: I once advised a client who unintentionally repurchased a stock in an IRA within 30 days. The loss was permanently disallowed and the client could not re-establish basis — a costly administrative oversight that could have been avoided with simple process controls.
Where to learn more / internal links
- When to Consider Tax-Loss Harvesting vs Holding for Growth: https://finhelp.io/glossary/when-to-consider-tax-loss-harvesting-vs-holding-for-growth/
- Tax Planning — Harvesting Losses Across Tax Lots: https://finhelp.io/glossary/tax-planning-harvesting-losses-across-tax-lots-advanced-tax-loss-techniques/
- Wash-Sale Rule: https://finhelp.io/glossary/wash-sale-rule/
Authoritative references
- IRS Topic No. 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409
- IRS Publication 550, Investment Income and Expenses (includes wash-sale rules): https://www.irs.gov/publications/p550
- IRS Form 8949 and Schedule D instructions: https://www.irs.gov/forms-pubs/about-form-8949
Professional disclaimer: This article is educational and does not constitute individualized tax or investment advice. Tax rules change and your situation may differ. Consult a qualified tax advisor and your financial custodian before implementing strategies described here.
If you’d like, I can produce a one-page harvest plan worksheet tailored to your situation, or model the after-tax impact of specific trades for your portfolio.
