Tax-loss harvesting explained: the silver lining when some stocks go down

Nov 16, 2023

New at Plenty

- The Plenty team
3 min read

Tax-loss harvesting is a way to minimize your capital gains tax bill at the end of each year. At Plenty, we help you tax loss harvest automatically to help optimize your returns.

Benjamin Franklin once said “In this world, nothing is certain except death and taxes”.

In the investing world, nothing is certain except the market going up and down – and also taxes.

The good news about taxes — bet you never thought you’d see good news and taxes in the same sentence — is that you can use something called tax-loss harvesting to not only lower your taxes, but also optimize your investment portfolio. It’s a strategy that the wealthiest investors have been using for decades. The secret’s out, and it’s not as complicated as you’d think.


TL;DR: Tax-loss harvesting

  1. It reduces your taxes by using losses to offset gains.

  2. It can boost your after-tax returns by roughly 2-4%.

  3. Each year, the Internal Revenue Service (IRS) allows up to $3,000 of capital losses to reduce your taxable income.



Ok, but what is tax-loss harvesting?


We’ve already talked about how the rich invest using a strategy called direct indexing, and one of the superpowers of direct indexing is finding the silver lining when some stocks go down.

Even the most successful investors know that not every investment is a winner all the time. Stocks can go up and down, and even great companies may have a tough week, month, or quarter – which can create a tax opportunity. Here’s how it works:

  1. You sell a stock that went down

  2. You find another stock that went up and sell it; creating a gain

  3. You use the loss to cancel out the gain. Now you don’t pay tax on the stock that went up, and can put that money back into the market. You’ve now saved on taxes and have more tax-free money to invest with.


What if you don’t have gains yet to conduct tax loss harvesting?


If you don’t have any gains from investments, you can still use up to $3,000 of losses every year to reduce your taxable income. As of now, there is no expiration for the number of years you can carry over the losses.


And did you know that tax-loss harvesting can actually boost your after-tax returns by roughly 2-4%?


That’s right! The wealthy are always looking for ways to minimize taxes now and in the future. Traditionally, they’ve been the only ones with access to these strategies because they could:

  1. Afford the high investing minimums required (like $250k+)

  2. Afford to actually buy whole shares of individual stocks (unlike the rest of us who could only afford ETFs)

  3. Afford wealth managers to do everything for them (buying, selling, monitoring for tax breaks, rebalancing their portfolios, etc). 


Well, it’s 2023 and about time that everyone has access to the best ways to build wealth. With early access to Plenty and just a $100 minimum deposit, you’ll get a higher-earning and tax-efficient way to invest. In fact, we estimate that with tax-loss harvesting, you can add roughly an extra 2-4% on top of your after-tax returns. That means lower taxes and more money in your pocket.  


Tax-loss harvesting almost sounds too good to be true


The wealthiest investors have been using this strategy for a while, and it may come as a surprise to some of you, but it IS legal. The IRS is fine with tax-loss harvesting and you can do it too as long as you follow their rules. Look out for this common one:


‘Wash sale’ rule


Basically, if you sell something at a loss and replace it with something pretty much identical within 30 days, that’s a “wash sale”. The IRS doesn’t like it. So they won’t let you claim that loss to offset gains.


Most tax experts would recommend you consult a professional before diving into tax-loss harvesting. Alternatively, advanced robo-advisors like Plenty use technology to offer automatic tax-loss harvesting services. This way, you don’t need to stress about following complicated tax rules.


When you’re investing at scale (like in hundreds of stocks), it's pretty complicated to keep track of all these things, but it's the perfect job for a machine. This is where Plenty comes in to do the heavy lifting for you.


When should you care about tax-loss harvesting? 


Tax-loss harvesting only benefits you if you’re required to pay capital gains tax (now or in the future). So if your individual income is over $45k (or over $84k if filing jointly), then you can use it to reduce your taxes.


It’s most effective for taxable account types (including 401k or IRAs where you don't pay taxes now, but you will pay taxes when you withdraw). It’s not as useful for after-tax or accounts with tax advantages (like a Roth IRA, Roth 401k, or 529c).


So, tax-loss harvesting can be a savvy way to save some money on your taxes. It’s kind of like playing chess with Uncle Sam - you strategically sell off investments at a loss and offset them against gains from other investments.


But keep in mind: tax laws can be tricky, so if you're thinking of tax-loss harvesting, you want to make sure that it's done right so that it pays off. 

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If you're a big reader like we are, you might want to learn more! Here are a few more references we like:

Tax-loss harvesting | Capital gains and lower taxes | Fidelity

How Tax-Loss Harvesting Works for Average Investors


- Team Plenty


This information is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.


Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.


Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.