The harvest of tax losses, or TLH for short, sells assets with losses (particularly during market slump) primarily to offset taxes owed on capital gains or income.
It shifts some of the taxes you may be owed now, that is, in the future. But the important point is this:
TLH can acquire a portion of the taxable investment and effectively turn it into a tax-deferred investment.
And, as we quickly demonstrate, tax investments can bring wonders to build wealth.
Tax me now or tax me later
Otherwise, I’ll take the dollars that would have been paid in taxes today. Invest it wisely now.
The odds are worth more in the long run and can even take away the taxes you are borrowing in the end. Depending on how your tax situation has been shaking over the years, Tax deferred investments are like Uncle Sam giving you an almost interest-free loan to invest in you.
This is a large part of the reason why tax deferred accounts like the traditional 401(k) and IRAs have restrictions. That is, it is reserved for retirement and its contributions conclude.
However, the harvest of tax losses opens a whole new door for tax deferred investments, along with the advantages of several other aspects. It offers a tremendous advantage, especially for several types of investors.
Open a taxable investment account today.
Who will benefit the most?
Let’s start with some important notes. TLH offers potential value to most investors, but in certain cases it can actually increase the tax burden.
But for now, let’s focus on three different investors who can enjoy some of the biggest rewards from their strategy.
High-income earners
If you offset all of the capital gains taxes realized in a given year, you can use the remaining harvested losses to offset your taxes with regular income of up to $3,000. Therefore, for high-income people, this means trading relatively low long-term capital gains tax rates and high-income tax rates. The final result is both tax deferrals and discounts.
Stable savings
Repeat deposits are not only a great way to start a savings habit, but they also provide more harvest opportunities. This is because older investments are less likely to fall below the initial purchase price (aka “cost”) and can be lost and harvested. For example, a stable IV of monthly sediment creates fresh investment crops for harvesting in the near future.
Tax Smart Philanthropists
A common misconception about harvesting tax losses is that it helps to avoid paying taxes altogether. However, believe it or not, there are two scenarios where you can actually cancel your taxes.
- The first one is When donating stocks to charities. As mentioned earlier, future tax bills will increase as part of the harvest, as a result of the sale and exchange of stocks. This is done by lowering the cost-based stock or the initial purchase price used to calculate capital gains. However, if you donate and exchange these shares in the future, you will reset your cost base to a new, higher level. This effectively wipes out the entire tax bill (!) that has reached that point. In the eyes of the IRS, those capital gains seem never to happen, and is one of the main reasons why wealthy investors have combined TLH with the practice of donating stocks for a long time.
- The second scenario is after death. At that point, of course, you will not receive a tax cut. However, any individual you leave stock is willing, as soon as you die, the cost base of your investment will be similarly “stepping up” to current market value.
Your harvest awaits
Historically speaking, the harvest of tax losses is time-consuming and expensive to implement for everyone except the wealthiest investors. However, low-cost transactions in technology and ETFs like us have become a mass tax strategy. Take market volatility in 2025 as an example. In just two weeks (March 26 to April 10), Betterment has harvested nearly $60 million in tax losses for its clients.
If TLH is right for you, the sooner you open and start contributing your tax account, the more you can put a portion of your taxable investment. If you already have a taxable account, here is how to turn on tax loss harvesting:
