Tax-Loss Harvesting for Self-Employed Investors: The Complete Guide

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title: "Tax-Loss Harvesting for Self-Employed Investors: The Complete Guide" description: "Step-by-step guide to tax-loss harvesting for self-employed investors: wash sale rules, ETF swaps, recordkeeping systems, and real tax scenarios." date: "2025-12-09" author: "Jonathan" category: "Taxes" readingTime: "15 min"

Tax-loss harvesting (TLH) sounds like one of those sophisticated Wall Street strategies that doesn't apply to regular people.

I thought the same thing until I calculated how much money I was leaving on the table.

Last year, I harvested $18,000 in losses from my taxable brokerage account. That offset $15,000 in capital gains from rebalancing and $3,000 of ordinary income. At my tax bracket, that saved me about $4,200 in federal taxes.

That's real money. That's a week of work I didn't have to do.

This post explains exactly what tax-loss harvesting is, how it works, the rules you need to follow (especially wash sale rules), and how to implement a system as a self-employed investor with variable income.

What Is Tax-Loss Harvesting?

Tax-loss harvesting is the practice of selling investments that have declined in value to realize a capital loss, which can offset capital gains and reduce your taxable income.

The Basic Mechanic:

1. You own an investment that's down (bought at $10,000, now worth $8,000)
2. You sell it to "realize" the loss ($2,000 capital loss)
3. The loss offsets gains (if you sold something else for a $2,000 gain, they cancel out)
4. Excess losses offset ordinary income (up to $3,000/year)
5. Remaining losses carry forward to future years

Why It Matters for Self-Employed Investors:

If you're self-employed like me, you likely have:

• Variable income year-to-year
• Flexibility to time when you realize gains/losses
• Ability to strategically harvest losses in high-income years

Example from my business:

• 2023: Great year, $140K income → harvest losses to offset gains and reduce ordinary income
• 2024: Slower year, $85K income → let investments ride, don't harvest (lower tax benefit)

This flexibility is a tax planning superpower.

How Tax-Loss Harvesting Saves You Money

The Tax Benefit Calculation:

Scenario: You harvest $10,000 in losses.

Option A: Offset $10,000 in short-term capital gains

• Short-term gains are taxed as ordinary income
• If you're in the 24% bracket: $10,000 × 24% = $2,400 tax savings

Option B: Offset $10,000 in long-term capital gains

• Long-term gains are taxed at 15% (for most FIRE pursuers)
• Tax savings: $10,000 × 15% = $1,500 tax savings

Option C: No gains to offset, use against ordinary income

• Limited to $3,000/year
• $3,000 × 24% = $720 tax savings
• Remaining $7,000 loss carries forward to next year

Key insight: Tax-loss harvesting saves the most when you have short-term gains to offset or high ordinary income.

Real Example: My 2024 Tax Situation

What happened:

• Rebalanced my portfolio in March, selling some tech stocks that had run up → $12,000 short-term capital gain
• VTI (total market ETF) was down in October → sold $15,000 worth at a $4,000 loss
• Bought ITOT (iShares total market ETF) the next day to stay invested

Tax result:

• $12,000 short-term gain - $4,000 harvested loss = $8,000 net short-term gain
• Tax on $8,000 gain at 24% bracket = $1,920
• Without TLH: Would have paid 24% on $12,000 = $2,880
• Tax savings: $960

Plus: I stayed invested in the market. I just swapped one total-market ETF for another.

The Wash Sale Rule (The Big Gotcha)

This is where most people screw up. The IRS has a rule to prevent abuse of tax-loss harvesting.

The Wash Sale Rule:

You CANNOT:

• Sell a security at a loss
• Buy the same security (or a "substantially identical" security)
• Within 30 days before or after the sale
• And still claim the loss

The 61-day window: 30 days before + day of sale + 30 days after = 61-day restricted period.

What happens if you violate the wash sale rule:

• The loss is disallowed
• The disallowed loss is added to the cost basis of the repurchased security
• You don't get the immediate tax benefit (it's deferred until you sell the replacement security)

What Counts as "Substantially Identical"?

This is where it gets tricky. The IRS hasn't clearly defined "substantially identical," but general guidance:

DEFINITELY substantially identical:

• Same stock (sell AAPL, buy AAPL)
• Same bond (sell a specific Treasury bond, buy the same Treasury)
• ETF and mutual fund tracking the same index from the same provider (sell VOO, buy VFIAX — both Vanguard S&P 500 products)

PROBABLY NOT substantially identical:

• Different providers tracking the same index (sell VOO (Vanguard S&P 500), buy IVV (iShares S&P 500))
• Different indexes (sell VTI (total market), buy VOO (S&P 500))
• Similar but not identical sector ETFs (sell VGT (tech), buy XLK (tech, different holdings))

GRAY AREA:

• Leveraged vs. non-leveraged ETFs
• Different share classes of the same fund

My rule: If I'm not 100% sure, I swap to a different provider's ETF or a different (but correlated) index.

Wash Sale Across Accounts (The Hidden Trap)

Here's something that surprises people: The wash sale rule applies across ALL your accounts, including:

• Taxable brokerage
• Traditional IRA
• Roth IRA
• Spouse's accounts

Example of a violation:

1. You sell VTI at a loss in your taxable brokerage (to harvest the loss)
2. Your auto-invest buys VTI in your Roth IRA 10 days later
3. Wash sale triggered. Loss disallowed.

How to avoid this:

• Pause auto-investments in tax-advantaged accounts during harvest season
• Swap to a different ETF in taxable while keeping the original ETF in retirement accounts
• Track purchases across all accounts

My Tax-Loss Harvesting System (Step-by-Step)

Here's the exact process I use quarterly:

Step 1: Quarterly Portfolio Review (Jan, Apr, Jul, Oct)

What I do:

1. Export holdings from my taxable brokerage (Fidelity)
2. Review each position and note:
   • Purchase date
   • Cost basis
   • Current value
   • Gain/Loss %
3. Identify positions with losses >5% (worth harvesting)

Tool I use: Fidelity's "Unrealized Gain/Loss" report (Accounts → Positions → Export CSV)

Step 2: Check for Gain/Loss Offset Opportunities

Questions I ask:

• Did I realize any capital gains this year? (Check YTD realized gains in brokerage account)
• Do I expect to realize gains before year-end? (Rebalancing, stock comp vesting, crypto sales)
• Am I in a high-income year where the $3,000 ordinary income offset is valuable?

If YES to any: Proceed with harvesting.
If NO: Consider waiting (unless I want to reset cost basis).

Step 3: Select Replacement Securities

For each position I'm harvesting, I identify a suitable replacement that is:

• Not substantially identical (different provider or different index)
• Highly correlated (so I stay invested in the market)
• Low cost (expense ratio under 0.10%)

My common swaps:

| Original ETF | Replacement ETF | Why It's Safe | |--------------|-----------------|---------------| | VTI (Vanguard Total Market) | ITOT (iShares Core S&P Total US Stock Market) | Different provider, slightly different holdings | | VOO (Vanguard S&P 500) | IVV or SPY (iShares/SPDR S&P 500) | Different provider, same index | | VEA (Vanguard Developed Markets) | IDEV (iShares Core MSCI EAFE) | Different index (FTSE vs MSCI) | | BND (Vanguard Total Bond) | AGG (iShares Core US Aggregate Bond) | Different provider | | VNQ (Vanguard REIT) | IYR (iShares US Real Estate) | Different index composition |

Why these work: Different providers, different index methodologies, but highly correlated performance.

Step 4: Execute the Harvest

Process:

1. Sell the losing position (morning, market order or limit order)
2. Wait for trade to settle (T+2 for stocks/ETFs)
3. Immediately (same day or next day) buy the replacement security
4. Set a calendar reminder for 31 days to swap back (optional)

Important: I don't wait to buy the replacement. I buy immediately to avoid being out of the market. Missing a few days of upside can wipe out the tax savings.

Step 5: Record Everything

This is critical for tax time. I maintain a Google Sheet with:

| Date | Action | Ticker | Shares | Cost Basis | Sale Price | Gain/Loss | Replacement Ticker | Notes | |------|--------|--------|--------|------------|------------|-----------|-------------------|-------| | 10/15/24 | Sell | VTI | 50 | $10,500 | $9,800 | -$700 | ITOT | Harvested loss to offset Sept rebalance gains | | 10/15/24 | Buy | ITOT | 50 | $9,800 | - | - | - | Replacement for VTI |

Why this matters: Your broker reports wash sales, but they only track trades within their platform. If you trade across multiple brokers or violate the wash sale rule in an IRA, you need to track it.

Step 6: Year-End Reconciliation

In December, I:

1. Tally total harvested losses for the year
2. Compare to realized gains
3. Calculate the tax benefit
4. Decide if I want to harvest more before Dec 31 or let remaining positions ride

Advanced Strategy: Tax-Loss Harvesting + Roth Conversions

Here's a powerful combo for self-employed FIRE pursuers:

The Strategy:

1. Harvest losses in your taxable brokerage to offset gains and reduce ordinary income
2. Use the tax savings to fund a Roth conversion from your Traditional IRA
3. Pay less tax on the Roth conversion because you lowered your AGI with harvested losses

Example:

• You harvest $15,000 in losses
• You offset $10,000 in capital gains and $3,000 of ordinary income
• Your AGI drops by $3,000
• You convert $30,000 from Traditional IRA to Roth
• Because your AGI is $3,000 lower, you're deeper into the 12% bracket instead of the 22% bracket
• Tax savings on conversion: ~$300-$600

Why this works for self-employed:

In slow business years, my income drops. I use TLH to drop it even further, then convert Traditional IRA to Roth at rock-bottom tax rates.

When Tax-Loss Harvesting Doesn't Make Sense

Don't Harvest Losses If:

❌ You're in the 0% long-term capital gains bracket
If your taxable income is under $47,025 (single) or $94,050 (married filing jointly) in 2024, your LTCG rate is 0%. Harvesting losses has no value.

❌ You have no gains to offset and you're in a low tax bracket
If you're in the 10-12% bracket and have no capital gains, the $3,000 ordinary income offset saves you $300-$360. Probably not worth the hassle unless you have large carryforward losses.

❌ You're close to the IRMAA threshold for Medicare premiums
If you're 63+ and your income is near the IRMAA cliff ($103,000 single, $206,000 married in 2024), reducing your AGI via TLH can save you $800-$2,000/year in Medicare Part B/D premiums. But if you're not near the cliff, it doesn't matter.

❌ You're triggering short-term losses to offset long-term gains
Short-term losses first offset short-term gains, then offset long-term gains. If you harvest a short-term loss but only have long-term gains, you're using a 24% (ordinary income rate) loss to offset a 15% (LTCG) gain. You "wasted" 9% of the loss's value.

Better: Wait until you have short-term gains to offset.

❌ The bid-ask spread and trading costs exceed the tax benefit
If you're harvesting a $200 loss but paying $15 in trading fees and losing $10 to bid-ask spreads, you're netting $175. At 24% tax rate, you save $42. You spent $25 to save $42. Barely worth it.

Robo-Advisors with Automated TLH (Betterment, Wealthfront, etc.)

Many robo-advisors offer automated tax-loss harvesting. Here's how they work:

How Automated TLH Works:

1. The robo monitors your portfolio daily
2. When a position drops below your cost basis, it automatically sells and buys a replacement ETF
3. It tracks wash sales across your account
4. It reports harvested losses on your tax forms

Pros:

• ✅ Fully automated (you don't think about it)
• ✅ Harvests losses year-round, not just quarterly
• ✅ Can harvest small losses ($100-$500) that you might not bother with manually

Cons:

• ❌ Advisory fees (0.25-0.50% annually) can outweigh tax savings
• ❌ Less control over which assets are sold and when
• ❌ Doesn't coordinate across accounts (can't see your Fidelity IRA or Robinhood account)
• ❌ May use weird replacement ETFs that drift from your intended allocation

My Take:

Robo-advisors make sense if:

• You have $100K+ in taxable accounts
• You're in the 24%+ tax bracket
• You don't want to manage it yourself
• You can get low-cost automated TLH (Wealthfront, Betterment, Schwab Intelligent Portfolios)

DIY makes sense if:

• You have under $100K in taxable accounts (fee % outweighs benefit)
• You're comfortable executing trades quarterly
• You want full control over your portfolio
• You have accounts at multiple brokers (robo can't see them all)

I do DIY because I only have $45K in my taxable brokerage (most of my wealth is in SEP IRA and Roth IRA). The tax savings from quarterly manual harvesting ($500-$1,000/year) beats paying 0.25% annually ($110+/year).

Once my taxable account hits $150K+, I'll reconsider automated TLH.

Special Considerations for Self-Employed Investors

1. Harvesting Losses in High-Income Years

As a self-employed person, my income varies wildly:

• Great year: $140K
• Slow year: $80K

Strategy: Harvest aggressively in high-income years (higher tax bracket = more value) and let positions ride in low-income years.

Example:

• 2023 (good year): Harvested $12K in losses → saved $2,880 in taxes (24% bracket)
• 2024 (slow year): Didn't harvest → kept positions, waiting for recovery

2. Coordinating TLH with Estimated Tax Payments

Self-employed people make quarterly estimated tax payments. TLH can reduce your Q4 estimated tax payment.

How it works:

1. Harvest losses in Oct-Dec
2. Reduce your projected taxable income
3. Lower your Q4 estimated tax payment (due Jan 15)

Example:

• I projected $120K income for 2024 → estimated tax payment of $8,000 in Q4
• Harvested $10K losses in November → projected income drops to $110K
• Adjusted Q4 payment to $7,000
• Saved $1,000 in cash flow that I can invest or use for expenses

3. Carryforward Losses for Future Gains

If you harvest more losses than you have gains, the excess carries forward indefinitely.

My strategy: In slow years, I harvest aggressively even if I don't have gains to offset. I build a "loss bank" to use in future high-income years.

Current loss carryforward: $8,400 (from 2022-2023)

When I'll use it: When I sell my business, sell real estate, or have a big capital gain event.

Tax Forms and Reporting (What You Need to Know)

Form 8949: Sales and Dispositions of Capital Assets

This is where you report every stock/ETF sale.

What you need:

• Date acquired
• Date sold
• Proceeds (sales price)
• Cost basis
• Gain or loss

Your broker (Fidelity, Schwab, Vanguard, etc.) sends you Form 1099-B with this info.

Wash sales: Your broker marks wash sales on the 1099-B with a "W" code. Those losses are disallowed.

Schedule D: Capital Gains and Losses

This is the summary form that calculates:

• Total short-term gains/losses
• Total long-term gains/losses
• Net capital gain/loss
• Amount used to offset ordinary income (max $3,000)
• Carryforward losses to next year

Form 1040: Where It Shows Up

The net capital gain/loss from Schedule D flows to Line 7 of Form 1040 (your main tax return).

If you have a net loss, it reduces your total income. If you have a net gain, it increases your total income.

Recordkeeping System (What I Actually Use)

Tools:

1. Google Sheets — Master tracking spreadsheet (harvested losses, wash sales, carryforwards)
2. Fidelity's Tax Center — Download 1099-B, Unrealized Gain/Loss reports
3. TurboTax Premier — Imports 1099-B and generates Schedule D automatically

Folder Structure:

Taxes/2024/
  ├── Brokerage_Statements/
  │   ├── Fidelity_1099B_2024.pdf
  │   ├── Fidelity_Realized_Gains_Losses.csv
  ├── TLH_Tracking/
  │   ├── TLH_Log_2024.xlsx
  │   ├── Wash_Sale_Checks.xlsx
  ├── Estimated_Tax_Payments/
  │   ├── Q1_Payment_Receipt.pdf
  │   ├── Q4_Adjusted_Calculation.xlsx

Why this matters: If you get audited (unlikely, but possible), you need to prove your cost basis and wash sale compliance. Keep records for 7 years.

Real Tax Scenario: Putting It All Together

Let me walk through a full-year example using my actual 2024 numbers (simplified):

Starting Position (Jan 2024):

• Taxable brokerage: $42,000
• Holdings: VTI, VOO, BND, VEA
• Projected income: $110,000 (self-employment)
• Tax bracket: 24% federal

March 2024: Rebalancing Triggers Gains

• Sold 30% of VOO (up 25% from 2023) → $6,000 short-term gain
• Need to offset this or I'll owe $1,440 in taxes (24%)

April 2024: Market Dip

• VEA (international stocks) down 8% from purchase
• Harvested $3,000 loss (sold VEA, bought IDEV as replacement)

July 2024: Portfolio Review

• No positions with meaningful losses
• Skipped harvesting this quarter

October 2024: Market Volatility

• BND (bonds) down 4% from purchase → harvested $2,000 loss (sold BND, bought AGG)
• VTI down 6% on one lot → harvested $1,500 loss (sold VTI, bought ITOT)

Year-End Tally (Dec 2024):

• Harvested losses: $6,500 ($3K + $2K + $1.5K)
• Realized gains: $6,000 (from March rebalance)
• Net: $500 loss

Tax result:

• $6,000 gain - $6,500 loss = -$500 net loss
• Use $500 to offset ordinary income
• Tax savings: $120 (24% of $500)

Plus:

• I stayed fully invested (swapped to equivalent ETFs)
• I have better diversification now (different providers)
• I reset my cost basis on the harvested positions (will grow tax-deferred until I sell)

Not amazing, but not bad for 4 trades that took 30 minutes total.

Common Questions

"Can I swap back to the original ETF after 31 days?"

Yes. After the 30-day window, you can sell the replacement ETF and buy back the original.

Why you might do this:

• You prefer the original provider (Vanguard vs. iShares)
• You want to consolidate holdings
• You're rebalancing anyway

Why you might not:

• The replacement ETF is basically identical (why bother?)
• You'd trigger another taxable event
• You'd pay trading fees again

I usually don't swap back. ITOT and VTI are 99.9% correlated. Not worth the effort.

"What if I accidentally trigger a wash sale?"

If you violate the wash sale rule, the loss is disallowed but NOT lost. It's added to the cost basis of the replacement security.

Example:

• Sell AAPL at $10,000 (cost basis: $12,000) → $2,000 loss
• Buy AAPL 10 days later for $10,000
• Wash sale triggered → $2,000 loss disallowed
• New cost basis of the repurchased AAPL: $10,000 + $2,000 = $12,000

Result: You can't deduct the loss now, but you'll get it back when you sell the replacement (because your cost basis is higher).

It's not the end of the world, but you lose the immediate tax benefit.

"Should I harvest losses every year, even if I don't have gains?"

It depends.

Harvest if:

• You expect gains in future years (building a loss bank)
• You're in a high tax bracket and the $3,000 ordinary income offset is valuable
• The position is unlikely to recover (you want to exit anyway)

Don't harvest if:

• You're in the 10-12% bracket (low tax benefit)
• You believe the position will recover quickly
• You'll violate the wash sale rule and lose the immediate benefit

My approach: I harvest losses most years to build carryforwards. Self-employment income is unpredictable, and I'd rather have losses ready to offset future gains.

My Take: TLH Is Worth It, But Don't Obsess

I used to think tax-loss harvesting was only for rich people with $1M+ portfolios.

Then I did the math. Harvesting $10K-$15K in losses per year saves me $2,000-$3,000 in taxes. Over 10 years, that's $20,000-$30,000.

That's real money. That's a year of living expenses in retirement.

But here's the thing: TLH is a bonus, not a core strategy.

The core strategies are:

1. Save aggressively
2. Invest in low-cost index funds
3. Max out tax-advantaged accounts
4. Don't panic sell during downturns

TLH is the cherry on top. It's a 5-10% improvement, not a game-changer.

My rule: I spend 2-3 hours per year on TLH (quarterly 30-minute reviews). If it takes more time than that, the juice isn't worth the squeeze.

Action Steps

1. Open a taxable brokerage account if you don't have one (Fidelity, Schwab, Vanguard)
2. Set quarterly reminders (Jan, Apr, Jul, Oct) to review unrealized gains/losses
3. Create a tracking spreadsheet to log harvested losses and replacement securities
4. Identify your common ETF swaps (VTI → ITOT, VOO → IVV, etc.)
5. Pause auto-investments during harvest season to avoid accidental wash sales
6. Coordinate with your CPA or tax software to report accurately on Schedule D

Related Resources

• Roth vs Traditional IRA for FIRE at 40 — Tax optimization strategies
• Solo 401(k) Guide for Self-Employed FIRE Seekers — Maximizing tax-advantaged contributions
• How to Calculate Your FIRE Number (Late Starter Edition) — Foundation for FIRE planning

External Resources:

• Bogleheads: Tax-Loss Harvesting — Comprehensive wiki
• White Coat Investor: TLH Guide — Detailed walkthrough
• IRS Pub 550 — Official guidance on investment income and expenses

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Disclaimer: I'm not a CPA, tax attorney, or financial advisor. I'm a 40-year-old self-employed business owner sharing what I've learned through research and personal experience. Tax laws are complex and change frequently. This post is educational, not tax advice. Consult a qualified tax professional before implementing tax strategies. For full legal disclaimers, see our disclaimer page.