Tax Loss Harvesting 2025
Tax Loss Harvesting 2025: Turn Red Positions into Green Returns
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By Billy Ribeiro | Globally Recognized Trader & Market Strategist
Billy Ribeiro is a globally recognized trader renowned for his mastery of price action analysis. In this guide, Billy breaks down exactly how institutional traders use the 2025 tax codes to mitigate losses—strategies he has personally used to navigate the volatility of the last 12 months.
Billy’s 2025 Key Takeaways
“It’s not about how much you make; it’s about how much you keep. Here is the reality check on taxes for this year:”
- Losses are a ‘Tax Asset’. If you cut a loser properly, you create an asset that offsets your winners. Treat it as a strategic tool, not a failure.
- The Wash-Sale Rule is the silent killer. I’ve seen traders sell a loser, buy it back 20 days later, and get slapped with a disallowed deduction. You must respect the 30-day window.
- Don’t let the tax tail wag the dog. Never sell a high-conviction stock just for a tax break if the transaction costs or market risk outweighs the savings.
- $3,000 is the magic number. Excess losses can offset up to $3,000 of your regular salary—this is essentially free money for high earners.
- Crypto “Economic Substance” Matters. While the wash-sale rule is technically loose on crypto, the IRS is cracking down on sham transactions.
What Is Tax Loss Harvesting? The Wealth Preservation Tool
Tax loss harvesting is the practice of selling a security that has experienced a loss to offset taxes on both capital gains and ordinary income. The sold security is replaced by a similar one, maintaining your optimal asset allocation.
Think of it as portfolio hygiene. In 2025, markets have seen sector-specific volatility. You likely have positions that are down. By realizing those losses, you lower your tax bill, effectively increasing your after-tax return.
Why Most Traders Fail at This:
Most retail traders hold onto “bags” hoping they will bounce back. They refuse to sell because selling makes the loss “real.” This is an emotional error. Professional traders realize the loss, bank the tax credit, and move the capital into a better vehicle or a similar ETF to stay in the game.
1. The Mechanics: Short-Term vs. Long-Term
In 2025, the IRS continues to differentiate between how long you’ve held an asset. This distinction is critical for your harvesting strategy.
Short-Term Capital Gains (Held < 1 Year):
Taxed at your ordinary income tax rate. For top earners, this hits 37%.
Long-Term Capital Gains (Held > 1 Year):
Taxed at preferential rates: 0%, 15%, or 20% depending on your income.
“I always prioritize harvesting short-term losses first. Why? Because short-term gains are taxed at the highest rate. If I can use a short-term loss to wipe out a short-term gain, I am saving myself 37% rather than just 20%. That is an instant ROI boost.”
2. The Wash-Sale Rule: The Trap You Must Avoid
The Definition:
The IRS disallows a loss deduction if you buy a “substantially identical” security within 30 days before or after the sale.
[INSERT ORIGINAL IMAGE: Wash Sale Timeline Diagram]
The “Substantially Identical” Grey Area:
- Identical (Bad): Selling SPY and buying SPY. (Wash Sale Triggered)
- Likely Identical (Bad): Selling GOOG (Class C) and buying GOOGL (Class A).
- Allowed (Good): Selling Coke (KO) and buying Pepsi (PEP).
- Allowed (Usually Good): Selling an individual stock (e.g., NVDA) and buying a Semiconductor ETF (e.g., SMH).
⚠️ Wash Sale Warning: Dividend reinvestment plans (DRIPs) often trigger accidental wash sales. If you sell a stock at a loss, but your auto-reinvest buys a fractional share 2 weeks later, you’ve triggered the rule on that portion. Turn off DRIPs for positions you plan to harvest!
3. The Strategy: How to Harvest Like a Pro
Phase 1: The Scan (Early December)
- Review all taxable accounts. (Remember, you cannot harvest losses in IRAs or 401ks).
- Identify specific lot losses. Use HIFO (Highest In, First Out) accounting. Even if your total position in AAPL is up, you might have bought a specific tranche at the top that is currently down.
- Calculate your net exposure. Do you have $10k in gains? Look for $10k in losses to neutralize the tax.
Phase 2: The Swap (Execution)
- Execute the Sell Order. Ensure you are selling the specific tax lots that are in the red.
- Execute the Buy Order immediately. Do not sit in cash. If the market rips while you are out, you lose more than you saved in taxes.
- The Swap: Sold Home Depot (HD)? Buy Lowe’s (LOW). Sold a Banking ETF? Buy a Financial Services ETF from a different issuer.
Phase 3: The Reset (31+ Days Later)
- Wait the full 30 days. (I recommend 32 days to be safe).
- Evaluate the proxy. Did your “swap” asset perform well? You might keep it.
- Swap back (Optional). If you prefer the original asset, you can now sell the proxy and buy back the original without penalty.
Advanced Concept: The Crypto Loophole in 2025
As of December 2025, digital assets technically face unique treatment. Because crypto is classified as “property” rather than “security” by the IRS, the Wash-Sale rule generally does not apply. This theoretically allows traders to sell Bitcoin at a loss and buy it back immediately.
The “Economic Substance” Risk:
However, you must be careful. The IRS has an “Economic Substance Doctrine.” If a transaction lacks economic purpose aside from tax avoidance, it can be disallowed.
“While the crypto loophole exists, I play it safe. I don’t buy back the *exact* same second. I might wait a few hours or a day, or swap into a correlated asset (like moving from BTC to ETH temporarily) to demonstrate economic intent beyond just tax evasion. Don’t give the IRS a reason to audit you.”
Common Harvesting Mistakes That Cost Millions
- Waiting until December 31st: Liquidity dries up during the holidays. You might get bad fills that eat into your tax savings. Start in early December.
- Missing the $3,000 Ordinary Income Deduction: If you have $10k in losses and $0 in gains, you can deduct $3,000 from your salary. The remaining $7,000 carries forward forever.
- Letting the Tax Tail Wag the Dog: Selling a high-quality asset just to save $500 in taxes, only to watch that asset rally 10% while you sit in a mediocre proxy. Investment merit comes first; taxes come second.
Recommended Resources
Frequently Asked Questions (FAQ)
Q: Can I use losses to offset my regular salary?
A: Yes, but with a limit. You can deduct up to $3,000 of net capital losses against non-investment income (like wages) per year ($1,500 if married filing separately). Any remaining loss carries forward to future years.
Q: Does tax loss harvesting work in my IRA or 401(k)?
A: No. Losses in tax-advantaged accounts are not deductible. This strategy only applies to taxable brokerage accounts.
Q: What if I accidentally trigger a wash sale?
A: Don’t panic. You haven’t broken the law. You just cannot claim the loss this year. The loss amount is added to the cost basis of the new shares, meaning you will realize the tax benefit eventually when you sell the new shares.
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DISCLAIMER: I am a trader, not a CPA or Tax Attorney. The content of this article is for educational purposes only and involves hypothetical scenarios. Tax laws (especially regarding Crypto and the Economic Substance Doctrine) are subject to change in 2025. Always consult a qualified tax professional before making significant financial decisions.
