Citi exposes the tax break most investors leave on the table every year | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

A new analysis from Citi Wealth reveals a decade-long tax break that has gone underutilized. Despite the simplicity and proven impact of this tax strategy, it remains one of the most underused ways to reduce annual capital gains taxes.

Even if you are an existing investor, this oversight may be costing you more than you think. What’s more interesting is that this strategy doesn’t require a financial advisor, a special account, or complicated paperwork.

All that matters is knowing exactly how this tax strategy works, when to use it, and how to avoid the mistakes that can disqualify your savings.

Citi Wealth says tax-loss harvesting is the best strategy

Tax-loss harvesting is the practice of selling investments that have declined in value to generate realized capital losses. Those losses can then offset capital gains you have earned from selling other investments at a profit.

The concept is straightforward, but the impact on your tax bill can be surprisingly large over a single calendar year. If you sold a stock for a $10,000 profit, you would normally owe taxes on that entire gain at tax time.

Selling another holding at a $4,000 loss would reduce your taxable capital gain from $10,000 down to just $6,000. That single move could save you hundreds or even thousands of dollars, depending on your tax bracket.

Most individual investors never take this step, even though it requires no special tools or professional credentials. Fewer than 30 percent of retail investors actively use tax-loss harvesting in any given year, according to some industry estimates.

How the IRS lets you turn losing investments into real tax savings

Your capital losses can do more than just offset your capital gains from selling stocks, bonds, or mutual funds. The IRS allows you to deduct up to $3,000 in net capital losses against your ordinary income each year.

If your total net capital losses exceed $3,000 in a single year, you can carry the remaining balance forward indefinitely. Those carried-forward losses can offset future capital gains or ordinary income in every subsequent tax year until death.

Long-term capital gains are currently taxed at 0, 15, or 20 percent depending on your taxable income and filing status, the IRS confirms. Short-term capital gains from assets held one year or less are taxed at ordinary income rates as high as 37 percent.

High earners may also owe an additional 3.8 percent net investment income tax on top of their regular capital gains rate. That means some investors could face a combined federal rate of 40.8 percent on short-term gains alone.

Turn losing investments into powerful tax savings by offsetting gains, reducing taxable income annually, and carrying forward excess losses for future benefits.

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Understanding how capital gains ordering rules work

The IRS requires you to offset short-term losses against short-term gains first, then long-term losses against long-term gains. Any excess losses from one category can then be applied against gains in the other category for further savings.

This ordering system matters because short-term gains are taxed at much higher rates than long-term gains for most people. Using short-term losses to cancel out short-term gains produces the biggest dollar-for-dollar tax savings in your portfolio.

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You should review your brokerage statements to identify which holdings qualify as short-term versus long-term before making decisions. Selling the wrong position at the wrong time could mean missing out on a much larger tax benefit.

A tax professional or your brokerage platform can help you sort your unrealized gains and losses by holding period. Many online brokerages now offer built-in tools that flag harvesting opportunities inside your taxable account automatically.

The wash-sale rule is the biggest mistake investors make with this strategy

The IRS does not let you sell an investment at a loss and immediately buy back the same security to claim the deduction. This restriction is called the wash-sale rule, and it disqualifies your loss if you violate it.

You cannot purchase a “substantially identical” security within 30 days before or after selling the losing investment, the IRS states. Violating this rule disallows your loss deduction, but the loss rolls into the cost basis of your replacement security and reduces your taxable gain when you eventually sell.

The one exception is repurchasing inside an IRA, where the loss is permanently forfeited because retirement accounts do not track cost basis for tax purposes the same way taxable accounts do.

The IRS has not published a precise definition of what qualifies as “substantially identical” for all situations. Most tax professionals recommend replacing a sold position with a similar but clearly different fund or individual stock.

For example, you could sell an S&P 500 index fund at a loss and purchase a total stock market index fund as a replacement. The two funds track different indexes, which generally keep you in compliance while maintaining your market exposure.

You cannot use this strategy inside your retirement accounts

Tax-loss harvesting only works in taxable brokerage accounts where you owe capital gains taxes on your realized profits. Your 401(k), traditional IRA, Roth IRA, and other tax-advantaged accounts are completely excluded from this approach.

Investments inside retirement accounts grow tax-deferred or tax-free, depending on the account type you are using. You do not report capital gains or losses within those accounts, so there is nothing for you to harvest.

This distinction matters because many investors hold the majority of their portfolios exclusively in retirement accounts. If your only investments are in a 401(k) or an IRA, tax-loss harvesting will not apply to your current situation.

You need to have investments in a regular taxable brokerage account to take full advantage of this strategy. Even a modest taxable account with a few index funds or individual stocks can create worthwhile harvesting opportunities each year.

Citi’s example shows how quickly the tax savings can add up

Citi’s analysis walks through a clear scenario that illustrates the math behind this strategy for everyday investors. Imagine you own two stocks in your taxable brokerage account, and one has gained $5,000 while the other has lost $3,000, Citi Wealth explains.

If you sell only the winning stock, you owe taxes on the full $5,000 capital gain at your applicable rate. Selling the losing stock simultaneously reduces your taxable gain from $5,000 down to just $2,000 after the offset.

That $3,000 reduction in taxable gains could save you between $450 and $714 in federal taxes alone, depending on your rate. Over five or 10 years of consistent harvesting, those savings compound into thousands of dollars kept in your pocket.

Automated investment platforms have reported substantial results from systematic tax-loss harvesting across their client portfolios. One major robo-advisor estimated its clients saved over $1 billion in taxes cumulatively through automated loss harvesting over a decade.

Smart investors time their harvesting throughout the year

Most people think of tax-loss harvesting as a December ritual, but waiting until year-end can actually cost you opportunities. Markets are volatile throughout the year, and losses that exist in March or July may disappear by December.

The best approach is to review your taxable portfolio quarterly or even monthly for positions trading below your purchase price. Setting up alerts through your brokerage platform can help you spot harvesting candidates before the opportunity closes.

“The key takeaway is that if your finances have even a little bit of complexity — capital gains, charitable goals, pretax retirement accounts — there are significant opportunities for tax savings,” said Jeremiah Barlow, chief solutions officer at Mercer Advisors.

Volatility events, such as the market swings seen in early 2025, created massive short-term harvesting windows for proactive investors. One major investment platform reported harvesting $100 million in losses for clients in just three days during one volatility spike.

Year-round monitoring does not mean you need to obsess over your portfolio or make trades every single week. It simply means checking in periodically so you can act quickly when a meaningful loss presents itself in your holdings.

Practical steps to start using tax-loss harvesting in your own portfolio today

Getting started with tax-loss harvesting is straightforward if you follow a clear process.

Key steps to implement this strategy correctly

Review your taxable brokerage account for any holdings currently trading below your original purchase price right now.
Identify whether each losing position is a short-term or long-term holding to maximize the tax benefit of any sale.
Sell the losing position and reinvest the proceeds into a similar but not substantially identical security within your portfolio.
Wait at least 31 full days before repurchasing the original security to remain compliant with the IRS wash-sale rule.
Track your realized losses carefully and report them on IRS Schedule D and Form 8949 when you file your tax return.
Consult a qualified tax professional if you have a complex portfolio with multiple accounts or significant capital gains to manage.

Starting this process does not require a financial advisor, but working with one can help you coordinate harvesting across multiple goals. The key is to make tax-loss harvesting a consistent part of your investment routine rather than an afterthought.

Your brokerage platform likely offers free tools that identify unrealized losses and flag potential wash-sale conflicts before you trade. Platforms such as Fidelity, Schwab, and Vanguard all provide built-in tax lot analysis for their taxable account holders.

Don’t let tax considerations override your overall investment strategy or push you into selling a position prematurely. The goal is to capture tax benefits when they naturally arise within your portfolio, not chase losses artificially.

A disciplined approach to tax-loss harvesting can meaningfully reduce your tax burden every year without changing your long-term investment plan. The strategy is free, legal, and available to every investor with a taxable brokerage account today.

When tax-loss harvesting might not deliver the savings you expect

Tax-loss harvesting is a deferral strategy, not a permanent tax elimination strategy, and you should understand this distinction clearly. When you lower the cost basis of your replacement security, you may owe more in capital gains taxes later.

If you are in a low tax bracket now but expect a higher income in future years, harvesting losses today could backfire. The deferred gains you eventually realize could be taxed at a higher rate than the savings you captured today.

Investors who hold mostly index funds in a strong bull market may struggle to find meaningful losses to harvest annually. The S&P 500 returned nearly 18 percent in 2025 alone, leaving fewer positions underwater for harvesting purposes.

State taxes add another layer of complexity, as some states tax capital gains differently from the federal government. You should always factor in your state tax situation before executing a harvesting strategy in your taxable account.