‘Tis the season… to harvest your tax losses.

At the end of every year, I have a simple (and profitable) holiday ritual:

This year, I don't have to work too hard because my direct indexing account has already generated $100K+ in usable tax losses.

However, a lot of people have written in asking me to share a turnkey tax-loss harvesting guide.

This post will show you exactly how to run the same playbook for your accounts:

You only ever pay capital gains taxes on the NET capital gains you incur.

This means if you have capital losses, these can be subtracted from your gains before calculating how much you owe in taxes.

If you have both short-term and long-term capital gains and losses, the same type first subtracts from the other first (i.e. short-term losses first deduct from short-term gains, and vice versa) — but eventually, excess losses can cancel out any type of gains.

If you end up with a net loss for the year, you can deduct up to $3,000 in losses from your ordinary income (i.e. your salary).

Any excess amount beyond $3K gets “carried over” to the next year, and can offset future capital gains.

There is no time limit as to how long these losses can be carried over!

Tax-loss harvesting is a tax reduction strategy of deliberately selling investments that have declined in value to claim a tax loss.

Here’s roughly how it works:

When done methodically, this can save a meaningful amount of taxes.

This strategy is particularly effective to offset taxes on short-term capital gains, which would otherwise be taxed at ordinary income rates.

The last step in tax-loss harvesting typically entails buying back a similar security so as to not meaningfully affect the future performance of your portfolio.

The reason we have to buy back a similar security versus the identical security is because of the wash sale trading rule.

The wash sale trading rule states that if you buy back a “substantially identical security” within 30 days (including across different accounts, or using your spouse), your tax loss is invalidated.

The disallowed loss is added to the cost basis of your original shares, and your holding period is adjusted to the time of the initial purchase.

What counts as a “substantially identical security”?

You can also always just wait 30 days and then buy back the identical security, but you run the risk of the price moving away from you.

Follow this step-by-step process towards the end of every year to potentially end up with no capital gains taxes.

Let’s figure out what we are working with.

First, look at your prior year tax return and see if you are carrying over any capital losses from the previous year.

Then, pull the realized capital gains and losses from your brokerage provider.

Exact instructions vary by broker, but I was able to pull this from relatively easily from Schwab and Robinhood:

Add them all up and figure out what your net capital gain for the year is.

If your net capital gain is negative, congratulations! You already will not owe any capital gains taxes.

If your net capital gain is positive, move on to the next step.

Go through your portfolio and identify stocks and ETFs that could present a good tax loss harvesting opportunity.

Some things to keep an eye out for:

Now, the easy part. Sell the specific shares to actualize and harvest your stock losses.

Luckily, I had some crypto I bought at pretty high levels, that I was able to sell and immediately reduce my capital gains taxes:

Since I tax loss harvested my crypto which doesn’t have a wash sale rule, I can immediately buy the identical security back!

I placed a buy order for $20K of Bitcoin, resulting in my portfolio ending up neutral but my net capital gain for the year immediately reduced:

I can then repeat this process with other stocks and securities till I end up with no net capital gains for the year.

If you have stocks you have generally lost confidence on, you can obviously sell them without replacing them with a similar security at all.

Earlier this year, I switched to direct indexing instead of investing in index funds.

With direct indexing, you buy every single company in the stock market index individually.

Since you own more individual positions, you benefit from increased volatility leading to more tax losses that can be harvested.

The upshot is you end up with the same performance as an index fund, with far greater tax efficiency along the way.

The direct indexing algorithm automatically harvested tax losses for me all through 2025 on autopilot:

So now, when I look at my net capital gains for the year, I already have a usable 6-figure tax loss that I can deduct from my gains.

I’ll be teaching a free workshop in January on how I use direct indexing to grow my money in a tax-efficient way. You can sign up here.

There are some more advanced strategies here as well like long-short direct indexing, which generates an even greater amount in tax losses… but I’ll save a detailed description for a future newsletter article.

While tax-loss harvesting is a very powerful tax strategy, it unfortunately is not magic. You are largely deferring taxes, and pushing more capital gains out into the future.

Specifically, here are some things to watch out for and be aware of when you start tax-loss harvesting:

By continually selling higher tax lots, you are systematically lowering your basis in a bunch of securities.

While this saves you taxes in the immediate term, it does potentially defer more taxes to the future.

The only way around this is death — at which point, you can pass the securities onto your heirs, and they receive an automatic step-up in basis.

If you aren’t re-investing new dollars at some kind of regular cadence, you could eventually run out of tax losses to harvest.

Over a long period of time, most stocks will eventually go up from your initial investment.

We see this with direct indexing algorithms all the time — these are most effective when you are investing on some kind of recurring basis.

If you have a low taxable income for a give year, you could potentially pay zero taxes on long-term capital gains.

In that case, you may want to attempt the opposite approach and aim to harvest as much as you can in tax gains while staying at the 0% bracket.

Tax-loss harvesting also has zero impact in tax-advantaged accounts like IRAs or Solo 401ks since taxes are already deferred in those accounts.

I’m teaching a free end of year tax planning workshop on Thursday. Save Big in 2025: Your Year-End Tax Strategy Masterclass”:

​In 45 minutes, I'm going to break down every tax saving strategy that needs to be implemented by December 31.

​Here's an overview of some of what we'll cover:

​Every participant will walk away with a checklist of things to look into (and potentially implement) before the end of the year.

Sign up here (I’ll also send a replay afterwards)

Full Disclosure: I'm writing this as myself, not as some investment adviser or broker-dealer. Purely educational or my personal thoughts - not investment, legal, tax, or professional advice. While my startup Carry owns an investment adviser and broker dealer, this is not meant to be an advertisement and nothing here represents them. Financial decisions involve risk, including losing money. Taxes are complex. Please do your own research or talk to a licensed pro before acting on anything you read here.