Advanced Tax-Loss Harvesting for Business Owners

The short answer: Tax-loss harvesting can reduce current or future tax liability when it is coordinated with your investment strategy, realized gains, income, charitable giving, and state-tax situation. But it is not a simple year-end trade. High-income investors and families can lose much of the potential benefit — or create new problems — by overlooking wash-sale rules, related accounts, concentrated positions, or the broader tax picture.

Tax-loss harvesting means selling an investment at a loss and using that loss to offset capital gains. If your losses exceed your gains, you may generally use up to $3,000 of net capital losses to offset ordinary income in a year, with additional losses carried forward under current federal rules.

The strategy can be valuable. It can also produce unnecessary trading, portfolio drift, or an investment decision that is driven more by taxes than by your goals. Here are seven mistakes to avoid.

1. Harvesting losses without considering your full tax picture

A loss may look attractive in isolation. The more important question is how it fits into your complete tax picture.

Before selling, you should consider:

• Realized short-term and long-term gains
• Capital-loss carryforwards from prior years
• Your current and expected future income
• The net investment income tax
• Upcoming liquidity events
• Required minimum distributions
• Roth conversions
• Business or real estate sales
• Your expected state of residence

For example, suppose you realize a $100,000 loss in a taxable brokerage account but have only $10,000 of gains this year. The loss can offset the gains, but only a limited amount may offset ordinary income immediately. The remaining loss becomes a carryforward. That may still be useful, but its value depends on whether you expect future gains.

A high-income investor planning to sell a business interest next year may benefit from preserving losses for that future gain. Another investor with no expected gains may have a less compelling reason to sell solely for tax purposes.

Tax-loss harvesting is a planning issue we frequently help clients evaluate as part of broader tax-aware investment and financial planning strategies.

2. Violating the wash-sale rule

The classic mistake is selling an investment at a loss and buying the same — or a substantially identical — investment within the restricted period.

Generally, the wash-sale rule applies when you sell a security at a loss and purchase the same or substantially identical security within 30 days before or after the sale. The rule creates a 61-day window around the transaction.

If the rule applies, the loss is generally disallowed for the current tax year and added to the cost basis of the replacement investment.

Consider this example:

• You sell 500 shares of a technology company at a $40,000 loss.
• Two weeks later, you buy the same company’s shares again.
• The $40,000 loss may not be available to offset your current gains.

The rule can also involve options, mutual funds, and exchange-traded funds. Determining whether two funds are “substantially identical” is not always straightforward.

One possible approach is to use a replacement investment that maintains an appropriate level of market exposure without being substantially identical. Your investment advisor and CPA should evaluate that decision together.

3. Ignoring your spouse and related-account transactions

Your brokerage account is not the only account that matters.

A purchase in your spouse’s account can create a wash sale after you sell an investment at a loss. The same concern can arise from transactions in:

• Joint taxable accounts
• Traditional and Roth IRAs
• 401(k) plans
• Automatic investment programs
• Trusts or entities you own or control
• Accounts held at a different custodian

Automatic dividend reinvestment is an especially common source of accidental wash sales. You may sell a mutual fund at a loss in your taxable account, only to have a dividend reinvestment purchase shares of that same fund in another account during the restricted period.

Before harvesting a loss, create a complete inventory of relevant accounts. Temporarily turning off automatic reinvestment may be appropriate, but the timing and implementation should be carefully monitored.

Custodians may report wash sales within the same account, but they may not identify every transaction across your household or outside institutions. You remain responsible for coordinating the full picture.

4. Letting taxes drive the investment decision

A tax benefit is not a reason to hold an unsuitable investment — or sell an appropriate one.

You should not harvest a loss if doing so:

• Removes an important portfolio exposure without a suitable replacement
• Creates excessive tracking error
• Increases concentration elsewhere
• Causes unnecessary transaction costs
• Conflicts with your liquidity needs
• Forces you to sell during a period when the investment remains appropriate

Taxes are one input in portfolio construction. They should not override your risk tolerance, time horizon, asset allocation, or spending needs.

This matters particularly when you hold a concentrated stock position. Selling a portion of a single company’s shares at a loss may provide a tax benefit, but the larger planning question is whether the position still exposes your family to unacceptable company-specific risk.

A thoughtful strategy may combine tax-loss harvesting with gradual diversification, charitable gifting, hedging analysis, or an organized liquidation plan.

5. Missing opportunities to coordinate gains and losses across accounts

Tax-loss harvesting becomes more useful when you coordinate it with transactions throughout your household — not just the account where the loss occurs.

For example, you may have:

• A taxable portfolio with unrealized losses
• A separate account with gains from rebalancing
• An inherited account that requires distributions
• A concentrated stock position that you want to reduce
• A private investment expected to generate a gain
• A business sale or real estate transaction on the horizon

The goal is to understand how these transactions interact before you trade.

It may be appropriate to use losses to offset gains generated by rebalancing or diversification. In other cases, harvesting losses now may be less valuable than preserving them for a known liquidity event.

Account location also matters. Taxable accounts, tax-deferred accounts, and Roth accounts serve different purposes. Capital losses in an IRA generally do not provide the same annual tax benefit as losses realized in a taxable account. A portfolio review should consider which assets belong in which account and how future withdrawals affect your tax rate.

For retirement income decisions, see our guide to tax-efficient retirement income. Also retain the required link to tax-efficient retirement income.

6. Overlooking state-tax and charitable-planning implications

Federal tax planning is only part of the analysis.

If you live in Illinois, capital gains generally flow through the state’s income-tax system. A move from Illinois to Nevada may change the state-tax treatment of future non-Illinois-source income because Nevada does not impose a state personal income tax. However, changing your mailing address is not necessarily enough to establish a new domicile.

Your planning should address:

• The date your residency changes
• Illinois-source income after the move
• Business interests and partnership income
• Illinois real estate
• Where work is physically performed
• Your family, home, and other continuing Illinois ties

A large gain realized before a properly documented move may receive different state treatment than a gain realized after the move. Coordinate this analysis with your CPA and, when necessary, a state-tax attorney.

Charitable planning also deserves attention. If you plan to make a substantial gift, donating appreciated securities directly to a charity or donor-advised fund may be more efficient than selling the securities first and donating cash. You may then be able to use harvested losses for other gains or portfolio transactions. See our related guide on lifetime gifting strategies.

Your charitable objectives, deduction limits, estate plan, and investment strategy should be reviewed together. This is especially important for families with appreciated stock, private business interests, or a donor-advised fund.

7. Failing to reinvest or review the portfolio appropriately

Harvesting a loss is only the midpoint of the process. You also need a disciplined plan for the proceeds.

After selling, ask:

1. What investment replaces the position?
2. Does the replacement preserve the intended asset allocation?
3. Is it sufficiently different for wash-sale purposes?
4. Does it introduce higher costs or new risks?
5. When will you reassess the replacement?
6. Should the tax savings be reinvested?

If you leave the proceeds in cash for too long, the portfolio may become underinvested. If you reinvest in an unsuitable substitute, you may create tracking error or lose the intended exposure.

You should also review cost basis, holding periods, tax lots, and realized gains after the transaction. A wash sale or basis-reporting error can affect future tax returns.

Tax-loss harvesting cannot eliminate taxes or guarantee investment results. The replacement investment may underperform the security you sold, and future tax rates may be higher or lower than today’s rates.

A 60–90 day tax-loss harvesting planning checklist

Begin well before December. A practical review can include:

60–90 days before year-end

• Review unrealized gains and losses by tax lot.
• Identify expected gains from rebalancing, business sales, or real estate.
• Gather information for every taxable, retirement, trust, and related account.
• Discuss your income, charitable gifts, and residency plans with your CPA.
• Identify concentrated positions that may require a broader diversification strategy.

30–60 days before year-end

• Confirm whether automatic purchases or dividend reinvestments should be paused.
• Evaluate potential replacement investments.
• Review short-term versus long-term gains and losses.
• Consider whether losses should be used now or carried forward for an expected future gain.
• Coordinate charitable gifts of appreciated securities with your advisor and estate attorney.

Within 30 days of any loss sale

• Monitor all household and related accounts for replacement purchases.
• Avoid the same or substantially identical security during the applicable window.
• Document the trade rationale and replacement investment.
• Review realized gains, losses, and updated cost basis.

After year-end

• Confirm transaction settlement dates.
• Review custodian tax documents for accuracy.
• Provide trade records to your CPA.
• Reassess whether the replacement investment still fits your portfolio.
• Reinvest tax savings when appropriate and consistent with your plan.

Frequently asked questions

Is tax-loss harvesting only useful for high-income investors?

No. But it may be more valuable when you have significant realized gains, a high marginal tax rate, or a planned liquidity event. The benefit depends on your complete financial and tax situation.

Can tax-loss harvesting eliminate my capital-gains tax?

It may offset realized capital gains, but it does not eliminate taxes in every situation. Losses exceeding gains are generally subject to limits when used against ordinary income, and future gains may be created when you sell replacement investments.

Does the wash-sale rule apply to my spouse’s IRA?

A purchase in a spouse’s account, including a tax-advantaged account, may affect the treatment of a loss sale. You should coordinate transactions across the household rather than relying only on one custodian’s reporting.

Should I sell a concentrated stock position just because it has a loss?

Not necessarily. The decision should consider your risk, liquidity, tax basis, charitable intentions, estate plan, and long-term diversification strategy.

How Virtue Asset Management helps

Virtue Asset Management provides fee-only fiduciary advice for high-net-worth families in Barrington, Oak Park, Glenview, Chicago, and the surrounding suburbs. Our CFA-led investment management and tax-aware investing process considers your portfolio, tax situation, retirement income, estate plan, and family priorities together.

We coordinate with your CPA and estate attorney when a decision crosses investment, tax, or legal boundaries. Because we deliberately serve a smaller client base, you receive personalized attention and direct access — not a generic year-end trading recommendation.

Explore our tax-efficient retirement planning, fiduciary financial advisor services in Barrington, fee-only financial planning in Barrington, and retirement planning services.

If you are in Barrington, Oak Park, Glenview, or Chicago, contact Virtue Asset Management to discuss whether tax-loss harvesting fits your broader plan.

Professional disclosure: This article is for general educational purposes and does not constitute individualized investment, tax, or legal advice. Tax-loss harvesting involves risks, including the possibility that a replacement investment underperforms the investment sold, creates portfolio tracking error, or produces a larger future tax liability. Wash-sale rules and state-tax rules are complex and subject to change. Consult your qualified CPA or tax attorney before implementing a tax strategy. Investment advice is provided under Virtue Asset Management’s fiduciary standard. Investing involves risk, including possible loss of principal.