As we approach the end of the year, it’s a good time to take a closer look at your investment portfolio — not just to review performance, but to explore ways to make your money work smarter at tax time. One powerful strategy often overlooked by both individuals and small business owners is tax harvesting.
And here’s something worth noting — the IRS has signaled upcoming changes to how tax-loss rules may apply to digital assets like crypto, including the wash sale rules. If you’ve dipped a toe into Bitcoin or other digital investments, you’ll definitely want to stay tuned.
What Is Tax Harvesting?
Tax harvesting (formally tax loss harvesting) is a strategy that involves selling investments that have declined in value to offset capital gains from other investments, or even reduce your taxable income. In simple terms, you’re turning temporary losses into a potential tax advantage.
When you sell an investment at a loss, you can use that loss to offset any realized capital gains. If your losses exceed your gains, you can deduct up to $3,000 ($1,500 if married filing separately) against other income, and carry forward any remaining loss to future years.
It’s a way of making lemonade out of lemons — by intentionally realizing losses now, you can reduce your overall tax liability later.
When to Use It
Tax harvesting works best as part of year-end tax planning or any time you’re rebalancing your portfolio. Here are a few ideal times to consider it:
1. Year-End Review: Late November through December is prime time to evaluate your taxable accounts for harvesting opportunities.
2. After Market Volatility: Market dips or corrections can create opportunities to realize strategic losses and reinvest for future growth.
3. When Rebalancing: If you’re adjusting your portfolio allocations — for example, trimming stocks and adding bonds — harvesting can help soften the tax impact of those changes.
Where It’s Best Suited
Tax harvesting generally applies to taxable investment accounts, not IRAs or 401(k)s (since those grow tax-deferred). It’s most beneficial when you:
- Have investments with unrealized losses,
- Expect to realize capital gains this year,
- Are in a moderate to high tax bracket, and
- Want to manage taxes proactively instead of reactively.
For small business owners, it can be especially effective when combined with other tax strategies like Section 179 depreciation, qualified business income deductions, or retirement plan contributions (SEP IRA, Solo 401(k), etc.). Together, these tools can create a powerful end-of-year tax-reduction strategy.
How It Helps Small Business Owners
If you’re a business owner with investments held in your name or through your business entity, tax harvesting can serve as a smart cash flow and tax management tool.
1. Smooth Out Income Fluctuations – Small business income can vary year to year. Harvesting losses in high-income years helps offset gains, potentially keeping you in a lower tax bracket.
2. Free Up Cash for Business Growth – Selling a loss position can provide liquidity — funds that can be redirected toward business expansion, debt reduction, or other investments.
3. Pair With Retirement Contributions – Harvesting losses and contributing to a SEP or Solo 401(k) before year-end can work together to reduce your overall taxable income even further.
4. Plan Ahead for Future Gains – If you anticipate selling a rental property, business asset, or stock next year, you can “bank” losses this year to offset future gains.
A Word of Caution: The Wash Sale Rule
The IRS prohibits claiming a loss if you repurchase a “substantially identical” investment within 30 days before or after the sale. This is known as the wash sale rule.
To stay compliant, you can:
- Wait at least 31 days before repurchasing the same security, or
- Invest in a similar (but not identical) asset — for example, swap one index fund for another tracking a different index.
Digital Asset Watch
Currently, cryptocurrencies and other digital assets are not subject to the traditional wash sale rules — but that’s expected to change soon. The IRS has indicated that updated guidance and new rules may apply starting in 2026, closing what some investors have used as a “crypto tax loophole.” Now is a great time to review your digital asset activity with your tax advisor and prepare for what’s ahead.
A Smart Strategy, Not a Silver Bullet
Tax harvesting isn’t about timing the market or panicking over paper losses. It’s about strategic tax management and long-term discipline. You’re not changing your investment philosophy; you’re simply improving your tax efficiency.
When combined with a comprehensive plan that includes retirement funding, insurance protection, and tax planning, this strategy can help preserve more of what you’ve worked hard to earn.
Final Thoughts
Tax harvesting is one of those techniques that rewards foresight. Used correctly, it can help reduce taxes, maintain portfolio balance, and free up cash for reinvestment or business needs.
At SDG Financial Services, we specialize in helping individuals and small business owners align their financial and tax strategies so they stay on course — every season of life and business.
Schedule your complimentary consultation today: calendly.com/sharongriffin
“Smart investors don’t just make money — they manage how it’s taxed.”
