Let’s start with a working definition of tax loss harvesting. Investopedia defines it as the timely selling of securities at a loss to offset the amount of capital gains owed from selling profitable assets.
The simple answer to our proposed question is this: You can reduce your tax bill.
Being cognizant of the potential capital gains from your taxable brokerage account can positively impact you. It forces you to pay more attention to your account's performance, regardless of whether that is good or bad. Being proactive with your portfolio can be a significant advantage rather than taking a set-it-and-forget-it approach. Another important fundamental fact in our capital gains discussion is the 2025 capital gains rates listed in the table below.
Tax rate | Single | Married filing jointly | Married filing separately | Head of household |
0% | $0 to $48,350 | $0 to $96,700 | $0 to $48,350 | $0 to $64,750 |
15% | $48,351 to $533,400 | $96,701 to $600,050 | $48,350 to $300,000 | $64,751 to $566,700 |
20% | $533,401 or more | $600,051 or more | $300,001 or more | $566,701 or more |
Simplest way to avoid paying capital gains
As you can see, not everyone, including most retirees, has to pay capital gains tax. Some may realize gains in the 0% capital gains bracket. According to the Motely Fool, the average retirement income is $75,000. Many married Americans with two incomes earn around $100,000. They assume they will have to pay capital gains on their winning stock if they sell it, when in reality, they may not need to based on their income level.
Remember, the standard deduction reduces your income before determining your capital gains rate. With the standard deduction for a married couple being $30,000 this year, a couple could have a gross income, before any deductions, of $126,700 and still be in the 0$ capital gains bracket. Keep in mind that realizing capital gains may increase your taxable income, which could bump you into the next capital gains tax rate.
For Example
Let’s say you bought Nvidia at a good time and had a long-term capital gain (stock owned for at least 12 months) of $10,000 in the stock. If your gross income is $121,700, only realizing a $5,000 gain this year would make sense. This way, you stay in the 0% capital gains bracket. If you wait until the following year to sell the rest of your gain, it is possible not to pay any taxes while realizing all of your gain on your stock.
This strategy should work well if you make sales in December and January because the stock's price is less likely to swing massively from one month to the next. But suppose the first sale is in the first quarter of the year. In that case, the strategy may be less effective because the stock has the potential to move significantly over the year before deferring the second sale of the following calendar year.
This same mindset and strategy of spreading gains out over two calendar years can also apply for investors on the other end of the spectrum: those making around $600,000 would want to avoid the 20% capital gains bracket, if possible.
Nuts and bolts of navigating capital gains
Let’s focus on those squarely in the 15% capital gains bracket. A nuance of tax loss harvesting is that you can only write off $3,000 of long-term capital loss each year. If you happen to get out of the stock that you have a significant loss on, you can eventually use all of the losses, but only $3,000 per year until all of the loss is realized. It is more desirable to realize the full effect of a loss immediately, so having some significant gains is ideal when you want to get out of some losing stocks.
For instance, if you had $13,000 in securities losses and had no gains to offset them, it would take you five years to use up your loss. But if you had at least $10,000 in gains in the same year, you could use all of your losses in just 1 year.
The timing of realizing gains and losses does not matter, only what calendar year they fall in. That is why if it appears that it makes a lot of sense to exit a position early in the year, you don’t need to feel the urgency to make an immediate offsetting move (gain or loss) if you don’t feel like there aren’t any obvious additional moves to make.
The Helping Hand
Investing can be confusing at times, but a trusted financial advisor can help guide you in the right direction. If you have questions about your portfolio or want to get started with investing, contact one of Whitaker-Myers Wealth Manager's Financial Advisors Team Members and schedule your appointment today.
How can I benefit from tax loss harvesting? - Part I
March 11, 2025
Matthew Harris
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