When to Consider Tax-Loss Harvesting vs Holding for Growth

Overview

Tax-loss harvesting and holding for growth are both legitimate ways to manage a taxable investment account, but they serve different goals. Harvesting is a tax-management tool: it turns unrealized losses into realized losses you can use to offset gains, reduce taxable income, or carry forward to future years. Holding for growth focuses on the investment’s long-term appreciation potential and compound returns. The right choice depends on your tax situation, the investment’s fundamentals, trading costs, and behavioral considerations.

How tax-loss harvesting works (concise mechanics)

• Realize a loss by selling a security that is worth less than your cost basis. The realized loss first offsets realized capital gains of the same character (short-term offsets short-term; long-term offsets long-term). Net losses beyond gains can offset up to $3,000 of ordinary income in a year ($1,500 if married filing separately); any remaining loss carries forward to future years (IRS Topic No. 409, Publication 550).
• The tax benefit equals the amount of loss used times the marginal tax rate that applies to those gains or ordinary income. Example formula: Tax saved = Offset amount × applicable tax rate. For example, if you realize $3,000 of losses and your capital gain tax rate is 15%, the immediate federal tax benefit is about $450.
• Avoid the wash sale rule: if you (or your spouse or a controlled account) buy a “substantially identical” security within 30 days before or after the sale, the loss is disallowed and added to the basis of the repurchased position (IRS Publication 550).

When harvesting is usually a better choice than holding for growth

1. You have realized gains to offset

• Harvesting is most valuable when you’ve realized capital gains in the same tax year or expect to, because realized losses directly reduce taxable gains. If you expect material gains from stock option exercises, concentrated-sales plans, or scheduled rebalances this year, harvesting can reduce the tax owed.

1. The security’s future upside is limited or risk profile has changed

• If the investment no longer fits your thesis (company fundamentals deteriorated, competitive landscape changed), selling a losing position to realize a tax loss and redeploy proceeds into higher-conviction or diversified holdings can be beneficial.

1. You can replace exposure without triggering a wash sale

• If you can buy a similar but not ‘‘substantially identical’’ security (different ETF provider, a sector fund versus single stock, or a broad index ETF that tracks the same market but isn’t identical), you can maintain market exposure while harvesting losses. See practical replacements below.

1. You need to harvest loss carryforwards

• If you have large prior-year carryforwards, harvesting additional losses may be lower priority. Conversely, when you lack carryforwards but have current gains, harvesting is attractive.

When holding for growth typically wins

• The investment has a credible path to recovery with superior expected returns. Selling simply for a short-term tax benefit can lock in a permanent opportunity cost if the position rebounds strongly.
• You have tax-advantaged accounts available for trade activity (IRAs, 401(k)s). Since those accounts shield gains and losses differently, preserving a high-upside holding in taxable and doing tactical moves in tax-advantaged accounts can make sense.
• Transaction costs, bid-ask spreads, or illiquidity make harvesting uneconomic. Always calculate net benefit after fees.

Practical examples and calculations

Example A — Offsetting a large gain

• You sold other positions this year and realized $20,000 of long-term capital gains. You hold a losing position with a $6,000 unrealized loss. Selling to realize that $6,000 loss reduces the taxable gain to $14,000. If your long-term capital gains tax rate is 15%, your federal tax savings on the sale is 6,000 × 15% = $900 (plus any state tax savings). The capture is straightforward and frequently worth the trade.

Example B — Small loss vs. high upside

• You own a small-cap stock down $3,000 but with a strong turnaround plan. If you sell to harvest, you lose potential recovery and dividend income. If the expected after-tax upside net of taxes and trading costs exceeds what you’d save by harvesting, holding for growth is better.

Wash-sale rule and special cases

• The 30-day wash-sale window applies to purchases made 30 days before or after the sale and to purchases by your spouse or an IRA you control. If a sale is disallowed under the wash-sale rule, the loss is added to the basis of the repurchased shares (IRS Publication 550: Wash Sales).
• Buying the same security inside an IRA within the wash-sale window not only disallows the loss — it typically causes a permanent loss because you cannot re-add the disallowed loss to the IRA basis. Avoid trading that recreates identical exposure in IRAs within the 61-day window around the sale.

Replacement strategies to stay invested without creating a wash sale

• Use a similar but not substantially identical ETF (different issuer or tracking index). For example, swap one total-market ETF for another with a different ticker or index methodology.
• Buy a sector or factor ETF that approximates exposure while avoiding identical holdings.
• Use cash or a short-term Treasury ETF for the 31-day interim, then repurchase the original position after the wash-sale window.

Tax-lot accounting and harvesting timing

• Specific identification vs. FIFO: When selling, nominate the tax lot you intend to sell (specific identification) to realize the desired loss while preserving lots with lower gains or better holding periods. Many brokerages support specific lot sales if you instruct them.
• Timing: year-end is a common time to inventory gains and losses, but opportunistic harvesting during volatility can be more effective. Ongoing monitoring avoids last-minute, emotion-driven trades.

Costs, friction, and behavioral factors

• Trading costs (commissions are lower than historically, but spreads, market impact, and bid/ask liquor can matter for thinly traded stocks).
• Behavioral taxes: locking in a loss can be psychologically difficult. In my practice, clients more often accept harvesting when they also use the proceeds to buy a clearly better or equivalent asset that matches their plan.
• Services: Many robo-advisors and custodians offer automated tax-loss harvesting that monitors wash-sales and manages replacements, which can be efficient for smaller accounts.

Common mistakes to avoid

• Triggering a wash sale by rebuying the same or substantially identical security within 30 days (or by buying in an IRA).
• Ignoring transaction costs and state taxes — compute net benefit.
• Letting tax optimization override investment discipline: harvesting shouldn’t force you into a portfolio that mismatches your risk tolerance or goals.

Checklist before you harvest

• Confirm realized gains for the current tax year and estimate marginal tax rates for those gains.
• Review the investment’s fundamentals and decide whether you’d hold it in a tax-advantaged account.
• Identify a replacement security that preserves desired exposure without being substantially identical.
• Use specific lot identification if available.
• Document trades and keep records for tax reporting.

Further reading and internal resources

• For techniques on using tax lots when rebalancing, see FinHelp’s guide on using tax-efficient lots when rebalancing taxable accounts: Tax-Efficient Lots When Rebalancing (FinHelp) — https://finhelp.io/glossary/investment-and-asset-allocation-using-tax-efficient-lots-when-rebalancing-taxable-accounts/
• For advanced loss-harvesting techniques across multiple tax lots, see Harvesting Losses Across Tax Lots: Advanced Tax-Loss Techniques — https://finhelp.io/glossary/tax-planning-harvesting-losses-across-tax-lots-advanced-tax-loss-techniques/
• For strategies beyond year-end, see Using Tax-Loss Harvesting Beyond Year-End — https://finhelp.io/glossary/using-tax-loss-harvesting-beyond-year-end/

Authoritative sources

• IRS — Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409 and IRS Publication 550 (Investments), including wash-sale rules: https://www.irs.gov/publications/p550
• Consumer Financial Protection Bureau — resources on taxes and investing: https://www.consumerfinance.gov

Professional note and disclaimer

In my practice I’ve found tax-loss harvesting produces the most value when it complements a clearly defined investment plan and when investors use replacements that keep portfolio risk and expected return intact. This article is educational and does not represent personalized tax or investment advice. Consult a qualified tax professional or fiduciary financial advisor before implementing strategies that materially affect your tax or financial situation.

Last reviewed: 2025. Content aligns with IRS guidance current as of 2025 but tax laws can change.