Year-Round Harvesting: Combining Gains and Losses for Tax Efficiency

Why year‑round harvesting matters

Realizing gains and losses throughout the year — instead of waiting until December — gives investors control over taxable outcomes, helps avoid last‑minute mistakes, and can reduce the tax drag on a portfolio. Tax drag is the difference between gross portfolio performance and after‑tax performance. By pairing realized gains with realized losses when appropriate, investors can lower their current tax bill and build loss carryforwards for tougher years.

This is not tax avoidance; it’s tax efficiency. The Internal Revenue Service treats capital gains and losses according to specific rules (see IRS resources below). Properly executed, year‑round harvesting lets you make tax‑aware trading decisions that align with long‑term investment goals.

Sources: IRS, Publication 550 and Topic “Capital Gains and Losses” (irs.gov).

How year‑round harvesting works (step by step)

1. Monitor tax lots and performance regularly. Track which lots are short‑term (held one year or less) and long‑term (held more than one year). Short‑term gains are taxed as ordinary income and usually carry higher rates than long‑term gains.
2. Identify opportunities to realize gains intentionally. In low‑income years, realizing long‑term gains might be taxed at 0% or a lower rate — a strategy called gain harvesting.
3. Identify positions with unrealized losses that you’re comfortable selling. Realized losses first offset realized gains of the same type (short‑ vs long‑term) according to IRS ordering rules; net losses then offset other gains and up to $3,000 ($1,500 MFS) of ordinary income per year, with excess carried forward.
4. Watch the wash‑sale rule. If you sell a stock at a loss and 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 shares (IRS Publication 550).
5. Reinvest thoughtfully. If you want to maintain market exposure, consider buying a different ETF or mutual fund that provides similar exposure but isn’t “substantially identical.”
6. Document trades and intent. Keep records and use portfolio tools that track tax lots and wash‑sale adjustments. Many advisors and robo platforms automate this process.

In my practice I recommend a quarterly review of taxable accounts for harvesting opportunities — more frequently during volatile markets.

Tax mechanics you must know

• Offset sequence: Realized short‑term losses first offset short‑term gains, and long‑term losses offset long‑term gains; then netting occurs to produce net capital gain or loss for the year (see IRS Schedule D instructions).
• Ordinary income offset: If net capital losses exceed net capital gains, you can use up to $3,000 of the excess to reduce ordinary income each tax year ($1,500 if married filing separately). Remaining losses carry forward indefinitely until used (IRS Topic “Capital Gains and Losses”).
• Wash sale rule: Disallowed losses due to wash sales are added to the basis of the repurchased shares and carried forward. This rule applies across taxable accounts and certain IRAs — be cautious when repurchasing similar securities in an IRA (see IRS Publication 550 and IRS guidance on wash sales).
• Holding period: Converting a short‑term loss into a long‑term position (or vice versa) changes future tax rates on gains. Tax‑aware trade sequencing matters.

Always report gains and losses on Form 8949 and Schedule D of Form 1040 as directed by IRS instructions.

Practical year‑round workflow (monthly/quarterly tasks)

• Monthly: Review large swings in positions and mark candidates for loss harvesting. Use your brokerage tax‑lot reports to identify unusually high basis lots or short‑term lots with gains.
• Quarterly: Execute straightforward tax‑loss harvesting trades and rebalance with tax‑sensitive replacements. Reconcile realized profit/loss and projected tax impact.
• Mid‑year: Evaluate income projections. If you expect a lower income year, consider harvesting long‑term gains earlier to take advantage of lower capital‑gains rates.
• Pre‑holiday / December: Do a final sweep to ensure no missed opportunities and confirm planned year‑end trades won’t trigger wash sales.

This cadence avoids the rush and mistakes that happen when investors try to perform a full tax‑harvest in December.

Examples (realistic, anonymized)

• Example A — Offset gains with losses: A client had $25,000 of realized long‑term gains from sold winners. We identified $18,000 of unrealized losses across other positions that the client was comfortable selling. By harvesting those losses during the year, the client reduced taxable gains to $7,000 and delayed tax on the remaining winners through tax‑efficient repositioning.

• Example B — Gain harvesting in low‑income year: A couple retiring early faced years with lower earned income before required minimum distributions (RMDs). We realized $40,000 of long‑term gains in that low‑income year and paid little to no capital‑gains tax because their tax bracket put them in a 0% long‑term gains tier. That reduced the couple’s future tax exposure and allowed rebalance into more tax‑efficient holdings.

In both examples, planning across the calendar year prevented accidental wash sales and allowed thoughtful repurchases.

Special situations and traps to avoid

• Wash sales across accounts: Buying the same or substantially identical security inside an IRA within the wash‑sale window can disallow a loss in the taxable account and offer no benefit in the IRA. Avoid repurchasing identical ETFs or stocks across taxable and retirement accounts without understanding the basis impact.
• Overtrading for tax reasons: Tax harvesting is a tool — not an investment strategy. Selling high‑quality holdings solely for tax reasons can harm long‑term returns if it changes asset allocation or increases transaction costs.
• Ignoring transaction costs and bid/ask spreads: Small losses may not be worth realizing after fees.
• Misunderstanding tax lot accounting: FIFO vs specific identification can change which gains or losses are realized. Use specific‑lot identification when possible to target the lots you intend to sell.

Interaction with other tax planning (asset location and withdrawals)

Year‑round harvesting should fit into a broader tax plan. For taxable accounts, consider where to hold taxable bonds, municipal bonds, or high‑turnover equity funds (tax‑efficient vs tax‑inefficient). Coordinate harvesting with retirement withdrawals, Roth conversions, and charitable plans to avoid surprising income spikes.

Useful related reading on FinHelp: Tax‑loss harvesting strategies and asset placement can change the optimal harvesting approach.

• Read more: Tax‑Loss Harvesting — practical rules and tax mechanics.
• Read more: Year‑Round Tax‑Loss Harvesting: A Practical Workflow — a workflow to implement the process.

Tools and automation

Many brokerages and robo‑advisors offer automated tax‑loss harvesting. These services continuously scan accounts for harvestable losses and can execute trades automatically, subject to your settings. Automation helps with frequency and recordkeeping but does not replace judgment on asset allocation and wash‑sale avoidance.

I often combine automated scanning with quarterly human review to ensure trades fit the client’s investment plan.

Common questions (brief answers)

• How much can I deduct against ordinary income? Up to $3,000 ($1,500 if married filing separately) per year; excess loss carries forward (IRS Topic “Capital Gains and Losses”).
• Can I harvest losses in an IRA? Losses in IRAs are generally not deductible. Be careful: repurchasing a substantially identical security in an IRA can trigger a wash‑sale disallowance in the taxable account.
• Should I harvest losses if it changes my asset allocation? Only if you rebalance thoughtfully into similar, tax‑efficient exposure; otherwise prioritize long‑term strategy over tax tweaks.

Checklist before you act

• Project your expected taxable income for the year.
• Review tax lots (short vs long term) and identify harvest candidates.
• Confirm no wash‑sale exposures across accounts (taxable and retirement).
• Calculate after‑tax benefit considering transaction costs.
• Record trades and update basis records; report on Form 8949 and Schedule D.

Final thoughts (professional perspective)

Year‑round harvesting is a pragmatic, discipline‑driven approach to reduce tax friction in taxable portfolios. In my practice, clients who adopt a regular harvesting cadence — paired with careful asset‑location planning — typically keep a higher share of their investment gains over time. However, the best harvesting plan is the one that supports your investment goals: tax efficiency alone should not drive excessive turnover.

Sources and further reading

• IRS, “Topic No. 409 Capital Gains and Losses,” https://www.irs.gov/taxtopics/tc409 (accessed 2025).
• IRS, Publication 550, Investment Income and Expenses (2024/2025), https://www.irs.gov/pub/irs-pdf/p550.pdf.
• FinHelp: Tax‑Loss Harvesting — https://finhelp.io/glossary/tax-loss-harvesting/.
• FinHelp: Year‑Round Tax‑Loss Harvesting: A Practical Workflow — https://finhelp.io/glossary/year-round-tax-loss-harvesting-a-practical-workflow/.

Professional disclaimer: This article is educational and does not constitute personalized tax, investment, or legal advice. Consult a qualified tax professional or financial advisor before implementing year‑round harvesting for your situation.