MML #046: Tax-Loss Harvesting: Turn Market Dips Into Tax Savings

We're heading into the final stretch of 2025, and if you haven't looked at your investment portfolio lately, now's the time. Not just to check performance—though that matters—but to see if you're sitting on any unrealized losses that could save you money on your tax bill.

Tax-loss harvesting is one of those strategies that sounds more complicated than it actually is. Here's the concept: you sell investments that have dropped in value to offset gains you've realized elsewhere in your portfolio. The result is a lower capital gains tax bill.

Nobody buys stocks or funds hoping they'll lose value. But losses happen. The data backs this up as markets rise about 70% of the time, but the average intra-year drop hovers around 14% according to JP Morgan’s Guide to the Markets research. Those temporary dips create opportunities if you know how to use them.

How It Works

Let's say you sold some winners earlier this year—maybe you trimmed a position that had grown too large or rebalanced your portfolio. Those sales triggered capital gains, which means you'll owe taxes. But if you have other investments that are currently underwater, you can sell those at a loss and use that loss to offset your gains.

Let’s look at some math to illustrate this. If you realized $10,000 in gains and you sell something for a $4,000 loss, you only pay capital gains tax on the net $6,000. If your losses exceed your gains, you can deduct up to $3,000 per year against your ordinary income. And any remaining carry forward indefinitely to be used in future tax years.

The Wash Sale Rule

The IRS has rules to prevent you from gaming the system. The wash sale rule says you can't sell an investment at a loss and then immediately buy the same thing back. Specifically, if you buy the same or a substantially identical security within 30 days before or after the sale, the IRS won't let you claim the loss.

Now, “substantially identical” is a grey area to say the least. So without getting into specific securities, you could essentially sell the losing position and immediately buy something similar but different enough to avoid the wash sale rule. You maintain your market exposure while still capturing the tax benefit. For example, you might sell one S&P 500 index fund and buy a different fund tracking a similar index (Russel 1000 comes to mind). Or swap one large-cap growth fund for another that utilizes a slightly different methodology. Keep in mind that after 30 days you could return to the original investment that was sold at a loss. 

The key is staying invested. Don’t make the mistake of selling for tax purposes but not reinvesting to capture future growth.

When This Makes Sense

Tax-loss harvesting works best when you have taxable brokerage accounts with both gains and losses in the same year. It doesn't apply to retirement accounts like 401(k)s or IRAs—those are already tax-advantaged.

This strategy is particularly valuable for lawyers in higher tax brackets where capital gains rates of 15% or 20% (plus potential net investment income tax) make the savings meaningful. Even if you don't have gains this year, banking losses to carry forward can offset future gains.

The Bottom Line

You've got about six weeks left to make this move for 2025. Review your portfolio, identify positions trading below your cost basis, and talk to your tax advisor about whether tax-loss harvesting makes sense for your situation. And as always, if you have questions about how this strategy applies to your situation, let’s talk. 

Market volatility is inevitable. You might as well put it to work for you.