Tax-Loss Harvesting: Why the Third Quarter Is the Right Time to Look
A framework for reviewing unrealized losses, the wash sale rule, and how tax-loss harvesting fits into a broader tax strategy — before December turns it into a scramble.
Most investors think about tax-loss harvesting in December, if they think about it at all. By then, the calendar is doing work that a calmer conversation earlier in the year could have done just as well.
The problem with a December-only approach isn't timing so much as posture. It treats tax-loss harvesting as a once-a-year cleanup rather than an ongoing part of managing a portfolio. A position that's down in July doesn't wait patiently for year-end to become useful — the opportunity is available now, with more time to act on it carefully.
At Windward, we review realized and unrealized gains and losses as part of our regular investment management process, not just in the fourth quarter. The third quarter is a particularly good moment to take stock: markets have had six months to move, your income picture for the year is coming into focus, and there is still runway to coordinate a decision rather than rush one.
What Tax-Loss Harvesting Actually Does
Tax-loss harvesting means selling an investment that is worth less than what you paid for it, realizing that loss for tax purposes, and reinvesting the proceeds in something similar to maintain your market exposure. The realized loss first offsets any realized capital gains elsewhere in your portfolio. If losses exceed gains, up to $3,000 of the excess can offset ordinary income each year, and anything beyond that carries forward to future tax years indefinitely.
The Wash Sale Rule Is the Part Most People Get Wrong
The IRS disallows a loss if you buy the same or a “substantially identical” security within 30 days before or after the sale — a window that spans 61 days in total. This trips people up more often through an IRA than a taxable account: buying the same security back in a retirement account within that window still triggers the wash sale rule, even though the purchase happened in a different type of account. Reinvesting in a similar-but-not-identical fund is usually the cleaner path.
Why Waiting Until December Narrows Your Options
Late-year harvesting means less time to select a replacement investment that avoids the wash sale rule, less time to confirm the trade settles cleanly before year-end, and less time to coordinate the decision with everything else on your year-end list — Roth conversions, charitable gifts, required minimum distributions. A July or August review gives you room to be precise instead of rushed.
Pairing Losses With the Rest of Your Plan
Harvested losses are most useful when they are paired intentionally with other decisions. If you are realizing gains elsewhere this year — rebalancing a concentrated position, selling real estate, executing a Roth conversion — losses harvested earlier in the year can directly offset that income. Reviewing tax-loss harvesting in isolation, separate from the rest of your tax picture, usually leaves value on the table.
The Windward Approach
Tax-loss harvesting is a small mechanical step, but it only works well inside a larger picture — your asset location, your income for the year, and the other moves you're already planning. Because Windward was built as a CPA firm, we look at these pieces together rather than as separate conversations, and we review harvesting opportunities throughout the year rather than waiting for a December deadline.
If it has been a while since your portfolio was reviewed for this specifically, it is worth a conversation before the fourth quarter arrives.
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