Key Takeaways
- You can sell losing investments to realize a capital loss that offsets taxable gains.
- If your losses exceed gains, you can deduct up to $3,000 against ordinary income ($1,500 if married filing separately).
- Unused losses carry forward indefinitely to offset future gains.
- Watch the “wash-sale rule.” You can’t repurchase the same (or “substantially identical”) investment within 30 days.
Investment losses are especially unpleasant for you as a small business owner.
Because your income rises and falls with your Bridgewater business. When the stock market drops, you may also be facing slower sales or tighter cash flow. And you might be counting on those investments to double as future business capital or retirement savings.
But, as your ever-optimistic tax professional, I want to point out the win to be found here: You can turn your losses into tax savings if you act before EOY.
Let me show you how.
What is tax loss harvesting?
Tax loss harvesting: selling investments that have declined in value to intentionally realize a loss for tax purposes.
The IRS allows you to use those realized losses to offset realized gains (profits from other investments you sold for more than you paid).
Let’s say earlier in the year, you sold some appreciated growth stocks, realizing a total $12,500 in long-term capital gains.
You identify a position in a separate emerging market fund that has performed poorly and is currently showing a paper loss. You had originally invested $35,000, and its current market value is $28,000.
Because you’re a smart cookie, you sell the emerging market fund to realize a capital loss of $7,000 ($35,000 minus $28,000).
Once you apply this $7,000 loss against your existing $12,500 in realized capital gains, you’re left to pay capital gains federal tax only on the remaining $5,500 net profit.
Can I use investment losses to reduce my regular income taxes?
Yes, if your total capital losses exceed your capital gains.
Let’s say you had $6,000 in capital gains and $9,800 in losses. The first $6,000 of loss offsets your gains dollar for dollar. You’re left with a $3,800 net capital loss.
You can deduct up to the annual limit of $3,000 of that net capital loss against your ordinary income.
That $3,000 deduction can directly reduce your taxable income from your Somerset County, NJ business or other sources. Any remaining loss beyond that (which is $800 in this case) can be carried forward indefinitely into future years until it’s used up.
Can I use investment losses to reduce more than $3,000 of ordinary income?
Yes, IF the investment qualifies as Section 1244 Stock. The $3,000 limit only applies to standard capital losses.
So, for stock acquired directly from a qualifying small business corporation (generally, one that received less than $1 million in capital), losses can be treated as ordinary losses.
This is a HUGE advantage: it allows you to deduct up to $50,000 (single) or $100,000 (joint) of that loss directly against your ordinary income (like business profits or wages) in the year the loss is realized.
What is the wash-sale rule?
The pesky wash-sale rule prevents you from claiming a loss if you repurchase the same (or “substantially identical”) investment within 30 days before or after the sale.
That means you can’t simply “sell low, buy back immediately” to lock in a paper loss. The IRS requires real separation between the transactions.
If you want to maintain market exposure, consider buying a similar (but not identical) fund or stock in the same sector.
What records should I keep for tax loss harvesting?
Track every transaction: the sale date, purchase date, cost basis, and sale price. Most brokerage platforms provide year-end summaries, but keeping your own spreadsheet or secure digital record helps ensure accuracy and makes our interactions that much smoother.
Many platforms also offer built-in tax-loss harvesting tools that calculate realized and unrealized gains in real time. Still, I highly recommend verifying everything manually before filing. Mismatches can trigger notices or delays with the IRS.
When does tax loss harvesting make the most sense for small business owners?
For business owners, this strategy can be especially powerful when preparing for:
- The sale of a business. If you anticipate a large capital gain from selling your company, you can offset a portion of that gain by harvesting losses in your personal investment accounts. (Consider your gains and potential exclusions.)
- Selling business property or real estate. Gains from these sales often flow through to your individual return if you operate as a pass-through entity. Capital losses can offset those gains (though not depreciation recapture, which is taxed as ordinary income).
- Down years for business income. If profits are lower, harvesting losses (especially the ordinary losses from Section 1244 Stock) may help smooth your total taxable income and provide flexibility to carry losses forward into stronger years.
Final thoughts
A few final thoughts on year-end strategy, and cautions before you harvest away:
– Accelerate deductions, defer income. As a cash-basis business owner, consider paying expenses (like supplies, insurance, or bonuses) before December 31 and deferring large client invoices until January. This shifts taxable income into the next year to lower your current tax bill.
– Don’t overdo it. Transaction fees, bid-ask spreads, and short-term trading can eat up your savings.
– Be aware of timing. All sales must settle before December 31 to count for the current tax year.
– Consider your bigger financial picture. Balance sound investing with smart tax planning, not letting one override the other.
If you’re unsure how this might apply to your own situation (especially if you’re considering selling your business, property, or other major assets soon) let’s connect before year-end:
calendly.com/william-torinoaccountinggroup
FAQS
“How much loss can I deduct in one year?”
Up to $3,000 ($1,500 if married filing separately) against ordinary income. Any unused portion carries forward to future years indefinitely.
“Can I offset gains from real estate or digital assets with stock losses?”
Yes. Capital gains and losses across asset classes (stocks, bonds, digital assets, real estate) can generally offset one another. Just ensure proper reporting and documentation.
“Do I have to sell all my losing investments?”
No. You can selectively sell positions that align with your broader portfolio goals. Don’t let taxes automatically push you into selling assets you believe will recover soon.
“What happens if I accidentally trigger a wash sale?”
You can’t claim the loss for that sale, but the disallowed amount is added to your new cost basis. Your eventual gain (or loss) will be adjusted accordingly when you finally sell for good.
“Can I harvest losses inside my IRA or 401(k)?”
No. Tax-deferred accounts don’t recognize capital gains or losses until distribution, so harvesting only applies to taxable investment accounts.
“How do state taxes impact harvesting investment losses?”
Most states follow federal rules for capital gains and losses, but some have unique carry-forward limits or rates. It’s worth checking your state’s specific rules.
“What if my small business stock investment results in a major gain?”
Stock purchased after July 4, 2025, could be eligible for federal capital gains tax exclusions if you hold it long enough. Specifically, you may be able to exclude up to $15 million in gains if you keep the stock for at least five years, or receive a partial exclusion if you hold it for three to five years.