Overview
Year‑round tax‑loss harvesting turns reactive, year‑end tax scrambling into a steady, repeatable routine that can lower your tax bill and smooth after‑tax returns. Instead of waiting until December, you monitor your taxable accounts quarterly (or more often), harvest losses when they make sense, reinvest in non‑identical exposures to remain invested, and track each trade so tax reporting is straightforward.
This article gives a practical workflow I use with clients, examples that show the math, IRS‑backed rules you must follow, and links to related guidance on the FinHelp site.
Why do this year‑round?
- More opportunities: Markets move continuously; losses that exist in March can be used months later against gains realized in June.
- Better tax smoothing: Harvesting gradually avoids a heavy tax‑loss rush in December and can reduce the probability of missing opportunities.
- Faster use of losses: Realized losses can be applied to gains realized earlier in the year rather than waiting until year‑end.
In practice, clients who adopt a year‑round cadence often capture more usable losses and avoid last‑minute mistakes like repurchasing identical securities and triggering wash‑sale disallowances.
Step‑by‑step workflow (practical and repeatable)
- Set your cadence and rules
- Establish scheduled reviews (quarterly is a common minimum; some active investors do monthly). Use alerts for tax‑lot declines of a defined percentage or dollar amount.
- Define triggers: e.g., sell if unrealized loss exceeds 10% and the position no longer fits the target allocation or risk profile.
- Identify harvest candidates
- Prioritize positions with clear tax benefits: short‑term losses first if you have short‑term gains, long‑term losses if you expect long‑term gains, and highly concentrated positions where de‑risking is needed.
- Use tax‑lot accounting (specific‑ID vs. FIFO). Specific‑ID lets you pick lots with the most favorable tax treatment; brokers usually allow this if you instruct them at sale.
- See advanced lot selection techniques: Tax Planning — Harvesting Losses Across Tax Lots.
- Execute sales and choose replacements
- Sell the losing lot(s) to realize the loss. Reinvest proceeds to keep market exposure but avoid buying the same or a “substantially identical” security within the 30‑day window around the sale to prevent a wash sale.
- Acceptable replacements commonly include: a similar ETF from a different issuer, a diversified sector ETF instead of an individual stock, or a slightly different mutual fund share class. Avoid repurchasing the same ticker.
- Track wash‑sale risk
- The IRS disallows a loss if you repurchase the same or substantially identical security within 30 days before or after the sale (a 61‑day window). The disallowed loss is added to the cost basis of the replacement holding, changing future gain/loss calculations (IRS Publication 550).
- Wash‑sale rules can apply across accounts, including IRAs. Buying the same security in an IRA within the window can permanently disallow the loss — don’t assume separate accounts are safe.
- For detailed discussion, see FinHelp’s Wash‑Sale Rule.
- Document trades and rationale
- Save trade confirmations and place notes in your investment tracker (date sold, lot cost, sale proceeds, replacement purchase, economic rationale). Good records simplify Form 8949 and Schedule D reporting.
- Report and carry over
- Report sales on Form 8949 and summarize on Schedule D (Form 1040). Net capital losses offset capital gains and then up to $3,000 ($1,500 if married filing separately) of ordinary income per year; excess losses carry forward indefinitely (IRS: Capital Gains and Losses guidance & Pub 550).
- Review performance and policy annually
- At year end (or after major life changes), run a tax‑efficiency review: confirm you didn’t inadvertently trigger wash sales, check carried‑forward losses, and adjust harvesting rules if market conditions or your tax profile changed.
Example calculations (practical illustrations)
Example 1 — Offsetting gains and ordinary income
- You sell a stock at a $3,000 realized loss (purchased for $10,000, sold for $7,000). You also have a $10,000 realized gain elsewhere. Net effect: the $3,000 loss offsets part of the $10,000 gain, reducing taxable gains to $7,000. If you have no other gains, and your net capital loss for the year is $3,000, you may also use up to $3,000 against ordinary income.
Example 2 — Loss carryforward math
- Total losses realized = $10,000; realized gains = $6,000. Net capital loss = $4,000. You may use $3,000 to offset ordinary income this year, leaving $1,000 to carry forward to the next tax year.
Example 3 — Wash sale trap at the IRA level
- You sell Stock A at a loss in your taxable account and, within 30 days, buy the same Stock A inside your IRA. The loss on the taxable account sale is disallowed and cannot be added to the IRA cost basis. The loss is effectively lost for tax purposes (IRS Pub 550 warns against this outcome).
Practical replacement choices that lower wash sale risk
- Use a different ETF that tracks the same sector but has a different issuer/ticker (e.g., Vanguard vs. iShares) — generally not treated as substantially identical.
- Buy a broader index ETF to maintain exposure while avoiding identical holdings.
- Use covered calls or cash positions briefly if you need a temporary wait before buying a similar exposure after 30 days.
Note: “Substantially identical” is not precisely defined in all cases. If in doubt, treat same‑index, same‑issuer share classes and direct stock repurchases as identical.
Operational tips and tools
- Enable tax‑lot visibility in your brokerage and set alerts for loss thresholds. Many brokers offer in‑platform harvesting tools or tax‑loss harvesting services.
- Consider automation for taxable accounts: automated advisors can harvest systematically but check for proper handling of wash‑sale rules and cross‑account coordination.
- Coordinate with your CPA before large harvesting moves late in the year; tax position and forthcoming income can change the optimal strategy.
Common mistakes to avoid
- Waiting until December and missing better early‑year opportunities.
- Triggering wash sales by repurchasing identical securities across accounts.
- Ignoring holding periods: short‑term loss vs. short‑term gain offsets are neutral, but long‑term losses used against long‑term gains may be less desirable if you expect to realize long‑term gains taxed at lower rates.
For more tactical discussion, see FinHelp’s related guides on When to Consider Tax‑Loss Harvesting vs Holding for Growth and advanced lot selection techniques: Harvesting Losses Across Tax Lots.
Reporting checklist (year‑end and beyond)
- Export all trade confirmations and cost basis reports from your broker. Brokers typically provide a consolidated 1099‑B showing proceeds and basis.
- Reconcile 1099‑B with your internal records; adjust for any wash‑sale disallowances reported by the broker.
- Report sales on Form 8949 and summarize on Schedule D. If your broker reports basis to the IRS, ensure you use the correct boxes on Form 8949.
Authoritative references: IRS Publication 550 (Investment Income and Expenses), IRS guidance on Capital Gains and Losses, and instructions for Form 8949 and Schedule D (IRS.gov).
Bottom line and professional perspective
Year‑round tax‑loss harvesting is a straightforward discipline: monitor, harvest when warranted, replace with economically similar but non‑identical securities, and keep meticulous records. In my practice, clients who adopt a year‑round workflow capture more actionable losses and avoid common traps (wash sales, poor lot selection) that reduce the strategy’s benefit. Coordinate with your CPA or tax advisor before making large decisions; tax rules change, and individual circumstances vary.
This article is educational and not individualized tax advice. Consult a qualified tax professional about your particular situation.
Sources and further reading
- IRS Publication 550, Investment Income and Expenses (current guidance) — https://www.irs.gov/publications/p550
- IRS: Capital Gains and Losses — https://www.irs.gov/taxtopics/tc409
- IRS instructions: Form 8949 and Schedule D (reporting sales)
- FinHelp glossary: Tax‑Loss Harvesting, Wash‑Sale Rule, Harvesting Losses Across Tax Lots
Disclaimer: This content is educational and does not replace personalized advice from a CPA, CFP®, or investment professional.
