Making Something of a Losing Position
September wasn't a great month for most investors. Markets pulled back, rate uncertainty crept back in, and the divide between what's worked in 2026 and what hasn't became harder to ignore.
If there are positions in a portfolio sitting at a loss right now, that's worth paying attention to. Not as a reason to worry, but as a potential planning opportunity.
It's called tax-loss harvesting. And the fourth quarter, particularly October, is one of the most practical times of year to think about it deliberately.
What tax-loss harvesting actually is
When an investment in a taxable account drops below its original purchase price, it's possible to sell that position, realize the loss on paper, and use it to offset capital gains elsewhere in the portfolio.
Less net gain means a lower tax bill.
If losses exceed gains for the year, up to $3,000 of the excess can be applied to reduce ordinary income. Any amount beyond that carries forward to future tax years indefinitely. No loss ever fully goes to waste.
A simple example
An investment sold earlier in the year generated a $10,000 gain. Elsewhere in the same portfolio sits a position currently down $8,000. Selling that losing position before December 31 largely cancels out the gain as taxes will be owed on a net of $2,000 instead of $10,000.
Same portfolio. Meaningfully smaller tax bill.
Why timing matters
Most investors think about tax-loss harvesting in December, if they think about it at all. There are two problems with waiting that long.
First, markets have a tendency to rally into year-end. Paper losses that exist today may not exist in six weeks. Waiting too long can close the window before there's an opportunity to act.
Second, acting in October rather than December allows time to be deliberate about how to reinvest the proceeds.
The wash-sale rule
The IRS does not allow an investor to sell an investment at a loss and immediately repurchase the same security. If the same — or a substantially identical — investment is bought within 30 days before or after the sale, the loss is disallowed.
The practical solution is straightforward: reinvest the proceeds in something similar but not identical. Selling a large-cap index fund and replacing it with a different fund tracking a comparable but distinct index, for example, maintains market exposure while preserving the tax benefit.
Choosing a good replacement takes a few minutes of clear thinking. That's easier to do in October than in the final week of December.
A few important boundaries
Tax-loss harvesting only applies to taxable brokerage accounts. Losses inside an IRA or 401(k) carry no tax benefit as those accounts aren't taxed on an ongoing basis to begin with.
It's also most effective when it fits naturally into an existing investment plan. The goal is a lower tax bill, not a worse portfolio. A position shouldn't be sold simply to generate a loss if the investment still makes sense to own. The tax benefit follows the decision, but shouldn't drive it.
Where it fits in the broader picture
Tax-loss harvesting works best when it's coordinated with the rest of the year's financial picture: income, realized gains from other sources, Roth conversion considerations, and any planned year-end moves.
For investors who've had a meaningful gain event in 2026 such a home sale, RSU vesting, a business transaction, or simply a strong year in a taxable account — a portfolio review this month is well worth the time.
The fourth quarter has a way of arriving faster than expected. The investors who tend to make the most of it are the ones who start thinking about it in October, or anytime during the year where the market provides an opportunity. Earlier in 2026 we saw bouts of volatility that created ample opportunities.