Let me start by saying that I once thought “tax-loss harvesting” involved tractors and perhaps a bumper crop of IRS refund checks. I pictured myself standing proudly in an imaginary field wearing a straw hat, reaping losses by hand and stuffing them into a manila envelope marked “Schedule D.”
As it turns out, the process is considerably less agricultural and slightly more confusing. Especially for someone who, like me, once tried to file a tax return using only a ballpoint pen, a coupon for senior bowling night, and a vague memory of something called a 1099.
This all began in earnest one winter, when I decided that I was going to “take control of my tax situation,” which is how retirees describe anything that involves reading fine print. The idea, according to a very upbeat article on a website clearly written by someone with multiple financial certifications and no sense of humor, was to sell investments that had gone down in value to offset the taxes I owed on the investments that had gone up.
This made a kind of sense, in the same way that eating a donut to balance out a kale smoothie makes sense. You’re still eating, but somehow you feel like you’re winning.
So I looked through my modest portfolio. There wasn’t much — a few shares of a solar energy ETF that had been underperforming so long I started referring to it as “Perpetual Cloud Cover,” and a couple of individual stocks that were doing about as well as a paper umbrella in a thunderstorm.
I decided to sell the worst performer, a stock I had bought on the enthusiastic advice of my cousin Gerald, who famously gets all his investing ideas from overheard conversations in diners. He had sworn up and down that this company — which made biodegradable packaging shaped like famous actors’ faces — was “the next Tesla.” Spoiler: it was not.
After selling at a loss that could only be described as character-building, I triumphantly entered the trade into my little spreadsheet and called my tax preparer, Linda, to share the good news.
“Well, that’s a start,” she said kindly, in the same tone a parent might use when a child presents them with a macaroni necklace held together by dreams and Elmer’s glue. “Now you’ll need to identify your realized capital gains so we can match things up.”
I nodded, then paused. “Wait… realized gains?”
“Yes,” she said patiently. “The gains you actually sold. Unrealized gains are just paper profits — you haven’t paid taxes on them yet. But if you sold something at a gain this year, your loss can offset it.”
I had not, in fact, sold anything at a gain. My portfolio was basically the financial version of a half-eaten meatloaf — lots of leftovers, nothing very exciting.
“Okay,” I said, still feeling like a tax-savvy wizard. “What if I don’t have any gains?”
“Then your capital loss can offset up to $3,000 of ordinary income,” she said.
Now that sounded useful. I mentally calculated how many bowls of oatmeal that could buy.
Just when I thought I was getting the hang of it, Linda added, “Also, you can’t buy back the same security within 30 days, or you trigger the wash-sale rule.”
Wash-sale rule?
I admit, at this point my brain began to fog. I vaguely remembered the “wash and repeat” part from shampoo bottles but hadn’t realized the IRS got involved.
“It’s to prevent you from selling just for tax purposes and then turning around and buying it back right away,” she explained.
“So… I can’t buy back my terrible solar ETF right away?”
“Nope. You’ll have to wait 30 days — or buy something similar but not ‘substantially identical.’”
I stared blankly. “Is this one of those things that gets determined in tax court with angry judges and large binders?”
“Sometimes,” she said, sipping what I’m fairly certain was a calming herbal tea.
In the end, I didn’t save a huge amount, but I did feel smarter. And a little smug. I even bragged to my neighbor over the fence — the one who still keeps all his money in CDs and refers to the internet as “that box of nonsense.”
“You’re harvesting your losses?” he asked, raising one eyebrow.
“Sure am,” I replied, confidently. “And I’ve got a bumper crop.”
What Is Tax-Loss Harvesting, Really? (The Serious Part)
Tax-loss harvesting is a perfectly legal and smart strategy that lets you use investment losses to offset gains — or, if you have no gains, to reduce your taxable income by up to $3,000 per year. For retirees with taxable brokerage accounts, this can be a surprisingly effective way to trim your tax bill.
Here’s how it works in plain English:
- You sell an investment that has lost value.
- You use that loss to offset any capital gains you’ve made from other investments.
- If your losses exceed your gains, you can deduct up to $3,000 from your regular income (like pensions or Social Security that is taxable).
- Any remaining losses can be carried forward to future years — indefinitely.
Yes, you heard right: indefinitely. So even if your tax bill doesn’t shrink much this year, it can help you next year… and the year after that… until the heat death of the universe (or Congress changes the tax code again, whichever comes first).
Why Retirees Should Consider It
Many people think this strategy is just for the ultra-wealthy with huge portfolios. Not true.
If you’re a retiree with:
- A taxable brokerage account
- Dividend-paying ETFs or stocks
- Occasional rebalancing needs
- Even modest capital gains…
…you can benefit from this strategy.
It’s particularly helpful if you:
- Rebalance your portfolio regularly and want to avoid a big tax bill.
- Have winners you want to take profits from, but dread the capital gains taxes.
- Own a few “loser” stocks or funds you’ve been hanging onto out of stubborn optimism or laziness.
By selling those losers, you create an opportunity to offset gains and keep more of your money.
A Word About the Wash-Sale Rule
Here’s where it gets a little trickier. If you sell a security at a loss, you can’t buy the same (or substantially identical) security back within 30 days. If you do, the IRS will disallow the loss for tax purposes. That’s what’s called a wash sale.
Workaround? You can buy something similar but not identical to maintain your investment exposure.
For example:
- Sell a losing S&P 500 ETF and buy a different S&P 500 ETF from another provider.
- Sell one large-cap value fund and buy a different one with slightly different holdings.
This keeps you invested in the market, while still harvesting your loss.
Real-Life Example
Let’s say you sold a stock you bought for $10,000, but it’s only worth $6,000 now. That’s a $4,000 capital loss.
Now let’s say you had another investment you sold for a $2,000 gain. Your $4,000 loss can completely cancel that out — and still leave $2,000 to deduct from your income.
Simple. Legal. Elegant. Like doing yoga with your taxes.
When to Harvest
Tax-loss harvesting is often best done:
- At the end of the year (November–December), when you have a clearer picture of gains and losses.
- During market dips, when it’s easier to find losers.
- When you’re planning a portfolio rebalance, so you can clean out underperformers while minimizing tax consequences.
Some robo-advisors even do this automatically for you.
Final Thoughts
Tax-loss harvesting might sound like something only a CPA or a hedge fund manager could love. But it’s a smart, entirely legal way for retirees to reduce taxes and make the most of their hard-earned nest egg.
Don’t let the jargon fool you — if I can do it (even with a few missteps), you can too. Just don’t forget to check with a qualified tax professional to make sure you’re doing it right — and avoiding any IRS “gotchas” like the dreaded wash-sale rule.
And if you ever feel overwhelmed, just remember: It’s not about perfection. It’s about progress — and keeping more of your money where it belongs.
This post is adapted from my book, Tax Loopholes Just for Seniors: 33 Ways to Slash Your Taxes Right Now, available on Amazon in paperback and eBook formats. It’s packed with easy-to-follow tips that can help retirees pay less and keep more — without hiring an army of accountants.
Disclaimer: This blog post is for informational purposes only and does not constitute tax, legal, or investment advice. Always consult a qualified tax advisor or financial planner before making financial decisions.