As a busy physician, you work hard for every dollar you earn (learn what to do once you’ve saved a million dollars or how to get to $10 million). But are you working equally hard to keep those dollars in your pocket when tax season arrives? One powerful strategy that many doctors overlook is tax loss harvesting. This simple technique can save you thousands in taxes each year, even when the market isn’t performing well. In fact, market downturns create perfect opportunities to turn investment “lemons” into tax-saving “lemonade.” Let’s break down how tax loss harvesting works and how you can use it to strengthen your financial health.

What Is Tax Loss Harvesting?

Tax loss harvesting is like performing preventive medicine on your tax bill. It involves strategically selling investments that have dropped in value to create a loss on paper. You then use these losses to reduce your taxable income. The beauty of this strategy is that you can immediately reinvest your money (with some important rules to follow) to maintain your investment strategy while still capturing the tax benefit.

Think of it this way: When a stock or fund drops in value, you have what’s called an “unrealized loss.” It’s only on paper until you sell. By selling, you “realize” the loss, which you can then use to offset:

• Capital gains from other investments you’ve sold at a profit
• Up to $3,000 of ordinary income each year (like your physician salary)
• Future capital gains if your losses exceed what you can use this year

For high-earning physicians in top tax brackets, this strategy can be especially valuable since you pay higher tax rates on both income and investments.

How Much Can You Actually Save?

Let’s look at a real-world example with numbers that make sense. Imagine you’re a cardiologist earning $400,000 yearly and in the 35% federal tax bracket. During the year, you:

• Sold some stocks for a $20,000 profit (capital gain) earlier in the year
• Have a tech fund that’s currently down $25,000 from what you paid for it

Without tax loss harvesting, you would owe $4,800 in taxes on your $20,000 gain (assuming a 24% long-term capital gains rate).

But if you harvest that $25,000 loss by selling the tech fund, here’s what happens:

• The $25,000 loss first offsets your $20,000 gain completely ($0 tax on the gain)
• The remaining $5,000 loss offsets $3,000 of your regular income
• The last $2,000 carries forward to next year

Your tax savings would be:

• $4,800 (tax saved on the capital gain)
• $1,050 (tax saved on $3,000 of income at 35% rate)
• Total savings: $5,850 this year alone

That’s enough to fund a nice vacation or make a healthy contribution to your child’s college fund—all without changing your long-term investment strategy.

Step-By-Step: How to Harvest Tax Losses

Tax loss harvesting isn’t complicated, but you need to follow certain steps and rules to do it right. Here’s a simple process you can follow:

Step 1: Review Your Investment Portfolio for Losses

First, look through your taxable investment accounts (not retirement accounts like 401(k)s or IRAs, as tax loss harvesting doesn’t apply there) to find investments that are worth less than what you paid for them. Your brokerage statement or online account should show your cost basis (what you paid) and current value for each investment.

For example, say you check your account and find:

• Total S&P 500 Index Fund: Bought for $100,000, now worth $115,000 (+$15,000)
• International Stock Fund: Bought for $60,000, now worth $51,000 (-$9,000)
• Small Cap Stock Fund: Bought for $40,000, now worth $32,000 (-$8,000)

You have potential harvesting opportunities with both the International and Small Cap funds.

Step 2: Decide Which Losses to Harvest

Not all losses are worth harvesting. Consider:

• Larger losses give bigger tax benefits
• Transaction costs (if any) should be factored in
• Your overall investment strategy shouldn’t be compromised

In our example, both funds with losses would be good candidates since the losses are significant.

Step 3: Sell the Investments to “Realize” the Losses

Once you’ve identified which investments to harvest, sell them through your brokerage account. This simple action converts your “paper losses” into “realized losses” that the IRS recognizes.

For instance, you would place orders to sell:

• All shares of your International Stock Fund ($51,000)
• All shares of your Small Cap Stock Fund ($32,000)

This gives you a total realized loss of $17,000 ($9,000 + $8,000).

Step 4: Immediately Reinvest the Money (With a Twist)

Here’s where many people make a mistake. You want to stay invested in the market, but you can’t simply buy back the exact same investments right away. Why? Because of the “wash sale rule.”

The wash sale rule says you cannot claim a tax loss if you buy the same security, or one that is “substantially identical,” within 30 days before or after selling. If you do, the IRS disallows the loss.

Instead, you should buy similar but not identical investments. For example:

• Instead of buying back the same International Stock Fund, buy a different international fund that tracks a different index
• Instead of buying the same Small Cap Fund, buy a different small cap fund from another company

This way, you maintain your overall investment allocation (international and small cap exposure) without violating the wash sale rule.

For our example:

• Use the $51,000 from selling the International Stock Fund to buy a different international equity fund
• Use the $32,000 from selling the Small Cap Stock Fund to buy a different small cap fund

Step 5: Record Your Losses for Tax Time

Keep detailed records of all your transactions. Your brokerage will provide a 1099-B form at tax time, but it’s good to have your own records too. You’ll report these losses on Schedule D of your tax return.

From our example, you’ll report:

• $9,000 loss from the International Stock Fund
• $8,000 loss from the Small Cap Stock Fund
• Total loss: $17,000

Step 6: Use the Losses to Offset Gains and Income

When filing your taxes, these losses will first offset any capital gains you had during the year. In our earlier example, the physician had $20,000 in capital gains, so $17,000 of those gains would be offset, leaving only $3,000 in taxable gains.

If you had no capital gains (or if your losses exceed your gains), you can use up to $3,000 of the remaining losses to offset your ordinary income. Any additional losses carry forward to future tax years.

Which Accounts Are Eligible for Tax Loss Harvesting?

Understanding which accounts allow tax loss harvesting is crucial for implementation:

Eligible accounts (taxable accounts):

• Individual brokerage accounts: Your standard investment accounts where you pay taxes on gains and dividends
• Joint brokerage accounts: Accounts held with your spouse that are subject to regular taxation
• Trust accounts: Taxable investment accounts held in trust structures

Non-eligible accounts (tax-advantaged accounts):

• 401(k) and 403(b) plans: Retirement accounts where gains and losses don’t have immediate tax consequences
• Traditional and Roth IRAs: Individual retirement accounts that grow tax-deferred or tax-free
• HSAs: Health Savings Accounts that offer triple tax advantages
• 529 education savings plans: College savings accounts with tax-advantaged growth

The reason tax-advantaged accounts don’t benefit from tax loss harvesting is that gains and losses within these accounts don’t create taxable events. You can’t deduct losses from your IRA against your taxable income, just as you don’t pay taxes on gains within your 401(k) until withdrawal.

Strategic Timing and Implementation

Effective tax loss harvesting requires strategic thinking about timing and coordination with your overall financial plan:

End-of-year considerations:

• December harvesting: Many investors focus on tax loss harvesting in December, but this can be done year-round
• Gain coordination: If you’re planning to take gains (like exercising stock options), harvest losses first to offset them
• Income planning: Consider your expected income for the year when deciding how much loss to harvest

Ongoing monitoring strategies:

• Threshold-based harvesting: Some investors harvest losses when they exceed a certain dollar amount or percentage
• Systematic rebalancing: Combine loss harvesting with regular portfolio rebalancing for efficiency
• Tax bracket management: Use harvested losses strategically based on your current and expected future tax brackets

Multi-year planning:

• Loss carryforwards: Unused losses carry forward indefinitely, so you can build a “bank” of losses for future use
• Retirement planning: Consider how loss harvesting fits with your transition from high-income working years to retirement
• Estate planning: Unrealized losses disappear at death due to stepped-up basis rules, so timing matters

When Is the Best Time to Harvest Losses?

Tax loss harvesting opportunities can appear anytime, but they’re especially common during:

• Market corrections (drops of 10% or more)
• Bear markets (drops of 20% or more)
• Times of high market volatility
• Year-end (last chance before the tax year closes)

Many successful physicians check for harvesting opportunities quarterly, with a more thorough review in November or December to capture any available tax benefits before year-end.

A gastroenterologist I work with made it a habit to review her portfolio after any market drop of 5% or more. During the market drop in early 2023, she harvested over $30,000 in losses while maintaining her investment strategy. These losses saved her nearly $10,000 in taxes.

Advanced Tax Loss Harvesting Strategies

Sophisticated investors often employ more complex strategies to maximize tax benefits:

Asset location optimization:

• Hold tax-inefficient investments in tax-advantaged accounts: Keep REITs and high-dividend stocks in retirement accounts
• Keep tax-efficient investments in taxable accounts: Hold index funds and individual stocks where you can harvest losses in taxable accounts

Factor-based harvesting:

• Style rotation: Sell losing value funds and buy growth funds (or vice versa) to maintain equity exposure while harvesting losses
• Geographic diversification: Switch between domestic and international funds when harvesting losses
• Sector rotation: Move between similar sectors that are likely to perform similarly long-term

Direct indexing strategies:

• Individual stock ownership: Instead of owning an S&P 500 fund, own the individual stocks to harvest losses on specific holdings
• Customized portfolios: Create tax-optimized portfolios that allow for more granular loss harvesting

An orthopedic surgeon I advise maintains a spreadsheet of “tax loss harvesting pairs” – funds that are similar enough to maintain his investment strategy but different enough to avoid wash sale issues. This preparation allows him to act quickly when markets drop.

Common Mistakes Physicians Make

High-income professionals often make these tax loss harvesting errors:

Emotional decision-making:

• Refusing to sell favorites: Holding onto losing investments for emotional reasons rather than tax benefits
• Perfect timing obsession: Waiting for the “perfect” moment instead of systematically harvesting losses
• Over-optimization: Spending more on transaction costs and complexity than the tax benefits justify

Technical violations:

• Wash sale rule violations: Not understanding the 30-day rule or how it applies across accounts
• Substantially identical confusion: Buying investments that are too similar and triggering wash sale treatment
• Spouse account oversights: Forgetting that wash sale rules apply to spouse accounts as well

Planning integration failures:

• Ignoring the big picture: Focusing on tax loss harvesting while ignoring more important investment fundamentals
• Poor record keeping: Not tracking cost basis and loss carryforwards properly
• Retirement account coordination: Not considering how taxable account moves affect overall asset allocation

Is Tax Loss Harvesting Worth Your Time?

As a busy physician, you might wonder if the effort is worth it. Consider these points:

• A single hour spent harvesting losses might save you thousands in taxes
• Many brokerages now offer tax loss harvesting tools or assistance
• The savings compound over time as you reinvest what would have gone to taxes
• For high-income physicians, tax savings are especially valuable

A dermatologist who started tax loss harvesting five years ago has saved approximately $27,000 in taxes during that time. That’s money that’s now growing in her investment account instead of sitting in the government’s coffers.

Tax Loss Harvesting Tools and Resources

Several tools can help busy physicians implement tax loss harvesting efficiently:

Robo-advisor services:

• Automated harvesting: Services like Betterment and Wealthfront automatically harvest losses in your account
• Direct indexing platforms: Companies like Aperio and Parametric offer sophisticated loss harvesting on individual stock portfolios
• Cost considerations: Weigh the fees against the tax benefits for your specific situation

Software solutions:

• Portfolio management tools: Software that can identify harvesting opportunities across your accounts
• Tax planning software: Programs that help coordinate loss harvesting with overall tax planning
• Record-keeping systems: Tools to track cost basis and loss carryforwards accurately

Professional guidance:

• Fee-only financial advisors: Advisors who can integrate loss harvesting with comprehensive financial planning
• Tax professionals: CPAs or enrolled agents who understand the complexities of loss harvesting for high-income individuals
• Investment managers: Professional managers who can implement sophisticated harvesting strategies

Conclusion: A Healthy Addition to Your Financial Plan

Tax loss harvesting is a valuable tool for high-income physicians, but it should complement, not drive, your investment strategy. The primary goal is always to build wealth through sound investing principles, with tax loss harvesting providing an additional benefit along the way.

For busy physicians, the key is to implement a systematic approach that doesn’t require constant attention. Whether through automated services, professional management, or periodic review, the important thing is to capture the tax benefits available from your inevitable investment losses.

Remember that tax loss harvesting is most valuable for investors in high tax brackets with significant taxable investment accounts. If most of your investments are in retirement accounts, or if you’re in lower tax brackets, the benefits may not justify the complexity.

This post is for informational purposes only and does not constitute investment advice. Always conduct thorough research and consult with financial professionals before making investment decisions.

About the Author: Dr. BWMD is a practicing physician and parent who writes about the intersection of medicine and personal finance. When not seeing patients or writing about physician finances, he enjoys spending time with his family and teaching the next generation of medical professionals about the importance of financial wellness.