Tax Loss Harvesting Basics for Business Owners
If you have built up some investments alongside your business, a few of them are probably sitting below what you paid. Tax loss harvesting is a way to use those paper losses to reduce the tax on your gains. It is not complicated, but it has a few rules that trip people up. Here are the basics, explained for busy owners who want to have a sensible conversation with their adviser before year-end.
Key takeaways
- Tax loss harvesting means selling investments at a loss so the loss can offset taxable gains.
- In the US, capital losses offset capital gains, plus up to $3,000 a year against ordinary income.
- The US wash-sale rule blocks the loss if you buy substantially identical securities within 30 days.
- In the UK, capital losses can be set against gains in the same or later years once reported to HMRC.
- It applies to taxable investment accounts, not to your business's day-to-day trading income.
Late September is a smart time to look at this. The year is far enough along that you know roughly what gains you have taken, and there is still time to act calmly before the December rush. Many business owners only think about investments when their accountant mentions them in January, by which point the window for US tax-year moves has closed.
An important note before we start: this article is general information, not tax, investment or financial advice. We are not licensed advisers, and the right move depends on your full tax position, your goals and the rules in force when you act. Please speak to a qualified tax professional or financial adviser before selling anything.
What tax loss harvesting is
When you sell an investment for more than you paid, you usually have a taxable capital gain. When you sell for less, you have a capital loss. Tax loss harvesting is the deliberate act of selling losing positions so that those losses reduce the tax due on your gains.
The investment's value has already fallen; selling simply makes the loss "real" for tax purposes. Many investors then reinvest the money in something similar, but not identical, so their overall portfolio stays roughly on track.
Where it applies for business owners
This is about investment accounts, such as a personal brokerage account or investments held outside tax-sheltered wrappers. It is not about losses in your trading business itself. If your shop has a slow year, that is an operating loss with its own separate rules.
Some business owners also hold investments inside their company. The rules for companies can differ from those for individuals, so ask your accountant how losses work in that structure before you act.
Common mistake
Harvesting losses inside tax-advantaged accounts. Losses inside accounts such as IRAs and 401(k)s in the US, or ISAs and pensions in the UK, generally do not create usable capital losses because gains in those accounts are not taxed in the usual way. Focus on taxable accounts.
How it works in the US
US rules allow capital losses to offset capital gains first. If your losses are larger than your gains, you can use some of the remainder against ordinary income, such as wages or business profits that pass through to you.
Losses beyond that limit can generally be carried forward to future years. Gains are also treated differently depending on how long you held the investment, with short-term and long-term gains taxed at different rates, so the order in which losses are matched can matter. Your tax preparer can work through this for your return.
The wash-sale rule
This is the rule that catches most people out. If you sell an investment at a loss and buy the same or a substantially identical security within 30 days, the loss is disallowed for now. It is generally added to the cost of the new purchase instead, so you do not lose it forever, but you do lose the benefit this year.
The rule can also be triggered by purchases in related accounts, such as a spouse's account, and by automatic reinvestment of dividends. Check the exact timing window and scope in current IRS guidance or with your tax preparer.
Pro tip
Pause automatic dividend reinvestment in any position you plan to sell at a loss, and put a calendar reminder for the date it is safe to buy back. A two-minute setting change can protect a loss you worked hard to harvest.
Year-end timing
For most individuals, the US tax year is the calendar year, so trades generally need to happen by the last trading day of December to count for that year. Brokers can get busy in late December, so it pays to act earlier.
How it works in the UK
In the UK, capital losses can be offset against capital gains in the same tax year. If you have more losses than gains, the unused losses can be carried forward and set against gains in later years. The key condition is that losses must be reported to HMRC, usually through Self Assessment, within the time limits.
The UK tax year runs to 5 April, not 31 December, so the timing of UK harvesting decisions often falls in late winter rather than late autumn. Still, autumn is a good moment to review your holdings, especially if you have already taken gains this tax year.
The UK does not use the same wash-sale rule as the US, but it has its own share-matching rules for buying back the same shares soon after selling. These can affect how a loss is calculated, so ask your accountant before selling and repurchasing the same shares.
Common mistake
Forgetting to report a loss. In the UK, an unreported capital loss may not be usable later. Even in a year when you have no gains to offset, reporting the loss can preserve it for the future.
A worked example
Numbers make this clearer. The figures below are invented for illustration and use US rules.
Example (made-up numbers)
Dana owns a design agency and invests spare cash in a personal brokerage account. Earlier this year she sold a fund for a $4,000 gain. Two other holdings are now down: one by $7,000 and another by $3,000. If she sells both losing positions, she realizes $10,000 of losses. These first wipe out her $4,000 gain, leaving $6,000 of net losses. She can generally use $3,000 of that against ordinary income this year and carry the remaining $3,000 forward.
Dana reinvests the proceeds in different funds that fit her plan, and she avoids buying back the same holdings for at least 30 days. Her overall investment mix barely changes, but her tax position improves.
How to run a harvesting review step by step
Here is a simple process you can follow once a year, ideally in the autumn.
- List your taxable accounts. Ignore tax-sheltered accounts for this exercise.
- Note gains already taken. Check your broker's realized gains report for the year.
- Find unrealized losses. Look for holdings now worth less than their cost basis.
- Check holding periods. Note whether each loss would be short-term or long-term where that matters.
- Plan replacements. Decide what you would hold instead so your strategy stays intact, avoiding substantially identical choices.
- Check the timing rules. Pause dividend reinvestment and confirm no recent purchases would trigger a wash sale.
- Talk to your adviser. Share your list and confirm the plan fits your full tax picture.
- Act and record. Make the trades, save confirmations and note the safe repurchase dates.
A harvesting review template
Copy this table into a spreadsheet. The values are made-up examples.
| Holding | Account | Cost basis (example) | Current value (example) | Unrealized gain or loss | Held over 1 year? | Replacement idea | Safe to rebuy after |
|---|---|---|---|---|---|---|---|
| Fund A | Personal brokerage | $20,000 | $13,000 | -$7,000 | Yes | Similar fund, different index | 30 days after sale |
| Stock B | Personal brokerage | $8,000 | $5,000 | -$3,000 | No | Sector fund | 30 days after sale |
| Fund C | Personal brokerage | $10,000 | $14,000 | +$4,000 (sold) | Yes | None needed | Not applicable |
When harvesting may not make sense
Tax loss harvesting is a tool, not a must. It can be less useful, or even counterproductive, in some situations:
- Very small losses. Trading costs and the effort may outweigh a tiny benefit.
- Low-income years. If your tax rate on gains is already low this year, using losses now may waste them. Your adviser can tell you whether saving them makes more sense.
- When you would sell an investment you still believe in and cannot find a suitable replacement. Do not let tax drive your whole investment strategy.
- Complex holdings. Options, crypto assets, property and company shares can have different or evolving rules. Get advice first.
Pro tip
Keep a running "loss bank" note with any carried-forward losses and the year they arose. Your accountant will thank you, and you will not forget a valuable loss when a big gain arrives, such as selling a property or part of a business.
Your tax loss harvesting checklist
- List every taxable investment account you hold
- Download this year's realized gains report
- Identify holdings below their cost basis
- Note holding periods and any carried-forward losses
- Choose replacement investments that are not substantially identical
- Pause automatic dividend reinvestment where needed
- Review the plan with a tax professional or adviser
- Make trades well before year-end and save confirmations
- Diary safe repurchase dates and report losses on your return
Frequently asked questions
Can I harvest losses if I have no gains this year?
In the US, net losses can generally offset up to $3,000 of ordinary income each year, with the rest carried forward. In the UK, reported losses can be carried forward to set against future gains. Check with your adviser whether it makes sense for you this year.
Can I buy the same investment back later?
Yes, but timing matters. In the US, the wash-sale rule disallows the loss if you buy substantially identical securities within 30 days. In the UK, share-matching rules can affect a quick repurchase. Plan the timing before you sell.
Does this reduce tax on my business profits?
Indirectly, at most. US individuals can use a limited amount of net capital losses against ordinary income, which may include business profits that pass through to them. Losses inside your company follow separate rules, so ask your accountant.
Do I need a financial adviser to do this?
Not necessarily, but it is wise to involve a tax professional, especially if you have several accounts, large gains or business shares. Mistakes with timing or reporting can cancel the benefit.
Related reading
The bottom line
Tax loss harvesting lets you turn investment losses into something useful: lower tax on gains and, in the US, a little relief against ordinary income. The essentials are simple. Work only with taxable accounts, watch the US wash-sale rule or UK share-matching rules, keep your strategy intact with sensible replacements and report every loss.
Set aside an hour this autumn to fill in the review template, then take it to your tax professional. A calm review now beats a rushed decision on the last trading day of the year.
