Tax-Loss Harvesting: Rules, Examples, and Cross-Border Planning
Ricardo Jesus, Financial Advisor at Liberty Atlantic Advisors
No investor enjoys seeing part of a portfolio decline in value. But in a taxable investment account, an unrealized loss can sometimes become a planning opportunity.
That opportunity is known as tax-loss harvesting.
At its simplest, tax-loss harvesting means selling an investment at a loss to offset gains elsewhere in your portfolio. For the right investor, it can reduce current-year taxable capital gains, create losses that may be used in future years, and support a more tax-aware approach to portfolio management.
For Americans planning a long-term move abroad, tax-loss harvesting can become even more important. Capital gains may be taxed differently once you become tax resident in another country, and the investment choices that worked well in the U.S. may not be as straightforward once you move to Europe.
It’s important to bear in mind that, when done correctly, tax-loss harvesting is just one element within a broader financial planning strategy. It should be coordinated with your investment allocation, tax residency, liquidity needs, and, in the case of our clients, long-term plans abroad.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is an investment tax strategy that involves selling an investment that has declined in value in order to realize a capital loss.
That realized loss can then be used to offset realized capital gains from other investments.
For example, imagine you sell one stock with a $10,000 gain. Later in the same tax year, you sell another stock with a $5,000 loss.
Instead of reporting a $10,000 net capital gain, the $5,000 loss may offset part of the gain, leaving you with a $5,000 net gain.
In simple terms:
Investment A gain: $10,000
Investment B loss: $5,000
Net capital gain: $5,000
That is the basic mechanics of tax-loss harvesting.
The strategy is most relevant in taxable brokerage accounts, where selling investments can trigger taxable gains or losses. It is generally not relevant in the same way inside retirement accounts such as traditional IRAs, Roth IRAs, or 401(k)s.
How Does Tax-Loss Harvesting Save Money?
Tax-loss harvesting may reduce taxes in a few ways.
First, capital losses can offset capital gains. If you have realized gains elsewhere in your portfolio, harvesting losses may reduce the taxable amount.
Second, if your losses exceed your gains, U.S. taxpayers may generally use a limited amount of excess capital loss to offset ordinary income. Unused losses may also be carried forward into future tax years.
Third, tax-loss harvesting can help spread taxable gains over time. Instead of realizing a large gain in one year, an investor may be able to realize gains more gradually while using losses to soften the tax impact.
This is especially important for investors with large taxable accounts and significant unrealized gains.
However, tax-loss harvesting does not make taxes disappear. In many cases, it defers or manages taxes rather than eliminating them entirely. It also does not change the fact that an investment declined in value.
Let’s be clear: the objective is not to manufacture complexity. Rather, the goal is to use the tax code thoughtfully while keeping the portfolio aligned with the investor’s financial plan.
Tax-Loss Harvesting Rules Investors Should Know
Tax-loss harvesting is conceptually simple, but there are some hard-and-fast rules to be aware of.
Gains and Losses Must Be Realized
A loss only becomes useful for tax purposes once the investment is sold. If an investment is down on paper, but you continue holding it, that loss is unrealized.
The same is true for gains. A stock or fund that has increased in value does not create a taxable capital gain until it is sold. (Note that this is the case in a U.S. context, other countries, such as the Netherlands, may tax unrealized gains in a portfolio.)
This is why tax-loss harvesting often becomes part of a year-end planning conversation. By the fourth quarter, investors and advisors usually have a clearer picture of realized gains, income, liquidity needs, and potential tax exposure for the year.
That said, tax-loss harvesting does not have to happen only at year-end. Particularly in volatile markets, opportunities may arise throughout the year.
Short-Term and Long-Term Gains Are Different
In the U.S., capital gains are generally classified as short-term or long-term depending on how long the investment was held.
Short-term gains typically apply to investments held for one year or less and are generally taxed less favorably than long-term gains. Long-term gains apply to investments held for more than one year.
This matters because tax-loss harvesting decisions should not be made in isolation. Selling a position may reduce one tax problem while creating another if it triggers short-term gains or disrupts the portfolio.
This is one reason tax-lot management matters. If you bought the same stock several times at different prices, some lots may have large gains, some may have smaller gains, and others may have losses. Choosing which lot to sell can affect the tax outcome.
The Wash Sale Rule
The wash sale rule is one of the most important tax-loss harvesting rules.
Broadly, investors are not permitted to sell a security at a loss and then buy the same, or a substantially identical, security within a 30-day window before or after the sale.
If the wash sale rule applies, the loss may be disallowed for current tax purposes.
This does not mean investors must sit in cash after harvesting a loss. In some cases, they may replace the sold investment with a similar but not substantially identical investment. However, this must be handled carefully.
Tax-Loss Harvesting in Taxable Accounts vs. Retirement Accounts
One of the most common misunderstandings about tax-loss harvesting is with regard to which accounts it can be a viable tax strategy.
Tax-loss harvesting is primarily a taxable account strategy
In a taxable brokerage account, selling an investment can create a taxable gain or a deductible loss. That is what makes harvesting possible.
Inside a traditional IRA, Roth IRA, or 401(k), trading investments does not generally create current taxable capital gains or losses in the same way. In a traditional IRA, taxation usually occurs when distributions are taken. In a Roth IRA, qualified withdrawals are tax-free under U.S. rules. (Note: With few exceptions – notably, France – most countries do not recognize the benefits of a Roth IRA account.)
For that reason, tax-loss harvesting usually does not make sense inside retirement accounts.
This distinction is especially important for Americans moving abroad. Many cross-border planning conversations focus heavily on retirement accounts, required minimum distributions, Roth IRAs, and pension income. Tax-loss harvesting belongs to a different part of the balance sheet: the taxable investment account.
Related reading: What Happens to Your Roth IRA If You Retire to Europe?
How Tax-Loss Harvesting Works with Stocks, ETFs, and Mutual Funds
Tax-loss harvesting can look different depending on what you own.
Individual Stocks
Individual stocks often create the most flexibility.
If a portfolio holds many individual companies, some positions may be at gains while others are at losses. An advisor may be able to harvest losses in one stock while maintaining exposure to the broader sector through another holding.
For example, if one technology company is down while another is up, there may be an opportunity to harvest the loss while preserving a similar overall portfolio allocation.
This requires care. Selling simply because a position is down can distort the portfolio. A loss should be harvested only if the trade makes sense within the broader investment plan.
ETFs
Tax-loss harvesting can also be done with exchange-traded funds (ETFs), but the opportunities may be more limited.
An ETF portfolio may hold only a handful of funds. If one ETF is sold to harvest a loss, the replacement must be chosen carefully so the portfolio does not drift away from the investor’s target allocation.
For example, selling an S&P 500 ETF and replacing it with an emerging markets ETF is not preserving the original category of investment, but materially changing a piece of the investing picture, which may affect the overall risk profile. That is not tax-aware planning; that is changing the portfolio.
With ETFs, tax-loss harvesting must be coordinated with rebalancing and risk management.
Related reading: Buffer ETFs and Managed Floor ETFs Explained
Mutual Funds
Mutual funds can be more complicated.
Because mutual funds pool many underlying investments, investors do not directly control the individual securities inside the fund. Gains and losses within the fund may be less visible or less controllable from the investor’s perspective.
Some mutual funds may also distribute capital gains to shareholders, even when the shareholder did not personally sell fund shares.
For Americans abroad, mutual funds can create additional complications because certain non-U.S. tax regimes and investment rules may treat them differently than U.S. investors expect. This is one of many reasons cross-border investment planning should begin before the move, not after.
Direct Indexing and Tax-Loss Harvesting
Direct indexing is one reason tax-loss harvesting has become more sophisticated in recent years.
Instead of owning a single index fund or ETF, a direct indexing strategy attempts to replicate an index by holding many individual securities.
For example, rather than owning one fund that tracks a broad U.S. stock index, the investor may own hundreds of individual stocks designed to approximate that index.
This creates more tax-loss harvesting opportunities.
In a portfolio with many individual positions, some stocks may be up while others are down. The advisor or software platform may be able to harvest losses at the individual security level while keeping the overall portfolio broadly aligned with the intended index exposure.
This can be especially useful for investors with:
Large taxable accounts
Significant unrealized gains
Higher income
Longer accumulation timelines
More complex cross-border planning needs
Direct indexing is not appropriate for everyone. It often requires sufficient account size, careful implementation, technology support, and ongoing oversight.
But for the right investor, it can create a more tax-aware taxable account structure.
Why Tax-Loss Harvesting Matters for Americans Moving Abroad
For Americans relocating to Europe, tax-loss harvesting may matter for reasons that go beyond a single tax year.
Many clients arrive at cross-border planning with taxable brokerage accounts that have grown substantially over time. They may hold positions with large unrealized gains, often built up over many years.
That’s not necessarily an urgent situation when you’re living in the United States. But once you become tax resident in another country, the tax treatment of future capital gains may change/
Countries such as Portugal, Spain, France, and Italy each have their own rules for taxing investment income and capital gains. Those rules are not identical to the U.S. system, and they should not be treated interchangeably.
Save for later: Should You Retire in Portugal or France? A Cross-Border Planning Analysis
This is where tax-loss harvesting can become part of a larger pre-move planning conversation.
Questions may include:
Should certain gains be realized before establishing tax residency abroad?
Are there losses that can offset gains before the move?
Should the taxable account be restructured before relocation?
How will the destination country tax future sales?
Would direct indexing provide more flexibility?
Are existing U.S. funds appropriate for life abroad?
How does this account fit alongside retirement accounts, Roth IRAs, and cash reserves?
The key point is that tax-loss harvesting is not just about reducing this year’s U.S. tax bill. For Americans moving abroad, it may support a broader strategy for managing unrealized gains, liquidity, and future tax exposure.
You might also like: The Four Best Places to Move Abroad from California with Family
Tax-Loss Harvesting, Rebalancing, and Portfolio Risk
One of the risks of tax-loss harvesting is that investors become so focused on reducing taxes that they unintentionally change the portfolio’s risk profile.
For example, selling an investment at a loss may reduce current-year capital gains. But if the replacement investment has a different risk profile, sector exposure, or geographic allocation, the investor may end up with a portfolio that no longer matches their needs.
This is especially relevant for retirees and pre-retirees preparing for a move abroad.
At that stage, the portfolio often has multiple jobs:
Supporting future income needs
Managing currency exposure
Providing liquidity for relocation costs
Preserving long-term growth
Coordinating with tax residency changes
Remaining aligned with risk tolerance
Tax-loss harvesting should be integrated into that bigger picture, and a well-managed tax-loss harvesting strategy considers both the tax result and the investment result.
When Tax-Loss Harvesting May Not Make Sense
Tax-loss harvesting is useful in some situations, but it is not universally beneficial.
It may not make sense if:
You do not have a taxable brokerage account
Most of your assets are in retirement accounts
You have few or no unrealized losses
The tax benefit is minimal
Transaction costs or spreads outweigh the benefit
Selling would disrupt your portfolio allocation
The wash sale rule creates too much risk
Your future tax rate may be lower
Local tax rules abroad reduce or eliminate the expected benefit
This is important because tax-loss harvesting can sound more universally useful than it really is.
For many retirees, the bigger planning questions may involve required minimum distributions, Roth conversion timing, Social Security, pension taxation, or estate planning. Tax-loss harvesting becomes more relevant when taxable investments represent a meaningful part of the balance sheet.
Tax-Loss Harvesting Software and Year-Round Planning
Tax-loss harvesting can become operationally complex.
If an investor has purchased the same stock many times over several years, each purchase may represent a different tax lot. One lot may have a large long-term gain. Another may have a smaller gain. Another may have a loss.
Choosing which lot to sell can materially affect the tax outcome.
This is one reason many custodians, direct indexing platforms, and investment managers use software to help identify harvesting opportunities. These systems can help track:
Tax lots
Unrealized gains and losses
Holding periods
Replacement securities
Wash sale windows
Portfolio drift
Technology can support the process, but it does not replace human judgment.
Software may identify a tax opportunity. A planner or advisor still needs to ask whether the trade fits the client’s broader financial plan, tax residency situation, investment allocation, and upcoming life changes.
That is especially true for Americans moving abroad, where U.S. tax rules are only part of the analysis.
Common Questions About Tax-Loss Harvesting
What is tax-loss harvesting?
Tax-loss harvesting is the process of selling an investment at a loss to offset realized capital gains from other investments. If losses exceed gains, some excess losses may be used against ordinary income within IRS limits, and unused losses may generally be carried forward.
Can tax-loss harvesting offset short-term capital gains?
Yes, capital losses can offset capital gains, including short-term capital gains. However, short-term gains are generally taxed less favorably than long-term gains in the U.S., so this should be handled carefully.
Can you tax-loss harvest in a Roth IRA?
No. Tax-loss harvesting is typically not useful inside a Roth IRA because trades inside the account do not create current taxable capital gains or deductible capital losses in the same way taxable brokerage accounts do.
Is tax-loss harvesting only done at year-end?
No. Year-end is a common time to review gains and losses because the tax picture is clearer. However, tax-loss harvesting opportunities can arise throughout the year, especially during market volatility.
Does tax-loss harvesting permanently eliminate taxes?
Not always. Tax-loss harvesting may reduce, defer, or manage taxes depending on the situation. It should not be viewed as a way to erase tax liability entirely.
Is tax-loss harvesting useful for expats?
It can be, especially for Americans with sizable taxable brokerage accounts and unrealized gains before moving abroad. Once you become tax resident in another country, future capital gains may be taxed differently, making pre-move planning especially important.
How does tax-loss harvesting work with direct indexing?
Direct indexing can create more opportunities for tax-loss harvesting because the investor owns many individual securities rather than a single fund. This allows losses to be harvested at the individual stock level while maintaining broad market exposure.
Final Thoughts: Tax-Loss Harvesting Is a Planning Tool, Not a Shortcut
Under the right circumstances, tax loss harvesting can help an investor manage realized gains, reduce current-year tax exposure, create future planning flexibility, and support a more tax-aware approach to portfolio management.
For Americans planning a long-term move to Europe, the strategy deserves particular attention before relocation. Once tax residency changes, the treatment of capital gains, investment accounts, and fund structures may change with it, potentially limiting your planning options.
If you are planning a long-term move to Europe and have significant taxable investments, Liberty Atlantic Advisors can help you evaluate how tax-loss harvesting, direct indexing, capital gains planning, and cross-border investment management fit into your broader financial plan.
References
Internal Revenue Service — Topic No. 409, Capital Gains and Losses
Internal Revenue Service — Publication 550, Investment Income and Expenses
Internal Revenue Service — Schedule D and Form 8949 guidance
How U.S. Retirement Accounts Are Taxed Abroad: A Comparative Guide
Disclaimer
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.
