How tax-loss harvesting can help business owners lower their tax burden.
By Sarah Hite, MBA, Northwestern Mutual Wealth Management Company
Running a business means you’re constantly juggling decisions: hiring, cash flow, taxes, growth plans, and the occasional existential crisis over payroll week. Somewhere in that chaos sits your investment portfolio—often quietly doing its thing in the background. But when markets get choppy, those investments can do more than just make you nervous. They can actually help reduce your tax burden overall.
Enter one of the more underappreciated tools in the tax-planning toolbox: tax-loss harvesting.
Before you picture someone wandering through an orchard picking sad-looking apples, let’s talk about what this strategy actually means—and how it can benefit business owners both personally and, in some cases, indirectly through their businesses.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is the practice of selling investments that have declined in value in order to realize a capital loss for tax purposes. That loss can then be used to offset capital gains elsewhere in your portfolio.
In plain English: if you’ve made money on one investment but lost money on another, the loss can help reduce the taxes owed on the gain.
For example:
• You sell stock in Company A and realize a $50,000 gain.
• You sell stock in Company B that has dropped in value and realize a $30,000 loss.
Your taxable gain becomes $20,000 instead of $50,000.
That difference can translate into meaningful tax savings, especially for high-earning business owners who may already be in higher tax brackets. This could mean the difference between paying the IRS 12% or 22%, 22% or 24%, 24% or 32%, etc.
But here’s where it gets interesting: the benefits don’t stop with offsetting gains.
Losses Can Offset More Than Gains
If your realized capital losses exceed your capital gains for the year, the tax code still gives you a break.
You can use up to $3,000 per year to offset ordinary income.
For a business owner reporting substantial income from their company—whether through a salary, K-1 distributions, or pass-through income—that can be useful.
Even better: unused losses carry forward indefinitely.
Think of it like building a tax shield you can deploy in future years. If you sell your business down the road, those accumulated losses might offset gains from that transaction (if you haven’t read it, check out my article in the Feb/Mar ‘26 edition to learn more about exit planning).
Not a bad “insurance policy” to have sitting on the shelf!
Why Business Owners Should Pay Attention
Business owners often have complex tax pictures. Income may flow through multiple channels:
• Salary or guaranteed payments
• Profit distributions
• Capital gains from
investments
• Real estate income
• Other business interests
Because of that complexity, small tax efficiencies can compound quickly.
Here are a few situations where tax-loss harvesting can be especially valuable for entrepreneurs.
1. Offsetting Investment Gains During Good Years: When business is thriving, owners often invest excess cash into brokerage accounts. Over time, those portfolios may generate gains from stock sales, mutual fund distributions, or portfolio rebalancing. Harvesting losses in underperforming investments can offset those gains and help keep the tax bill under control.
2. Managing Taxes During Liquidity Events: If you sell a piece of real estate, a side investment, or even a portion of your business, capital gains taxes can be significant. Strategically harvesting losses beforehand can reduce the taxable impact. This doesn’t eliminate taxes entirely, but it can soften the blow.
3. Creating Future Tax Flexibility: Some business owners accumulate losses over time and carry them forward for future years. This can become incredibly valuable when selling a business, selling highly appreciated investments, and diversifying a concentrated stock position. In those moments, previously harvested losses can reduce the tax cost of making big financial moves.
Tax-Loss Harvesting Isn’t Just “Selling the Losers”
One of the biggest misconceptions about tax-loss harvesting is that it means abandoning your investment strategy. That’s not how professionals approach it.
Instead, the process often looks more like this:
1. Identify an investment currently trading below its purchase price
2. Sell the position to realize the tax loss
3. Reinvest the proceeds into a similar (but not identical) investment to maintain market exposure
The goal is to capture the tax benefit without drastically changing your portfolio allocation. In other words, you’re adjusting the plumbing—not demolishing the house. But this is where things can get tricky.
The Wash Sale Rule: The Buzzkill of Tax Planning
The IRS anticipated that investors might try to game the system, so it created something called the wash sale rule. The rule states that if you sell an investment at a loss and then buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is disallowed. Yes, the IRS really did create a 61-day window specifically designed to ruin lazy tax strategies.
Here’s a simple example:
You sell shares of a stock for a loss on December 1. If you buy that same stock back before December 31, the IRS says the loss doesn’t count. Instead, the loss gets added to the cost basis of the new purchase, delaying the tax benefit.
For investors who don’t track these rules carefully, it’s surprisingly easy to accidentally trigger a wash sale—especially if the investment appears in multiple accounts.
For example:
• A brokerage account
• A spouse’s account
• An automatic dividend reinvestment plan
• A retirement account
Yes, even activity in an IRA can trigger wash sale complications, which is why this strategy should never be done casually.
Why Business
Owners Should
Involve Their
Financial Advisor
Tax-loss harvesting sounds simple on paper but executing it properly requires coordination. A knowledgeable financial advisor can help ensure the strategy is used effectively by:
1. Monitoring portfolios for harvesting opportunities: Markets fluctuate constantly. Professional advisors track portfolios throughout the year to identify losses that can be harvested strategically.
2. Avoiding wash sale traps: Experienced advisors know how to maintain investment exposure while avoiding “substantially identical” securities.
3. Coordinating with your broader tax picture: For business owners, taxes rarely exist in isolation. Advisors often work alongside CPAs to understand expected income for the year, business profitability, planned asset sales, and other capital gains events. This allows harvesting to be done intentionally, rather than reactively.
4. Integrating the strategy into long-term investment planning: Tax savings are valuable, but they should never derail the bigger financial picture. A professional advisor keeps the portfolio aligned with your goals while still capturing available tax benefits.
A Word of Caution: Don’t Let the Tax Tail Wag the Investment Dog
One of the biggest mistakes investors make is selling strong long-term investments purely for tax reasons. Taxes matter—but they shouldn’t drive every investment decision. The goal of tax-loss harvesting isn’t to chase losses or time the market. It’s simply to take advantage of declines that already exist. Think of it as financial recycling. Markets go up. Markets go down. If something temporarily dips below its purchase price, harvesting that loss can turn an otherwise frustrating moment into a small tax win.
The Bigger Picture for Business Owners: Entrepreneurs spend an enormous amount of time thinking about how to generate income. But building wealth also depends on how efficiently that income is managed and taxed – it’s not only about sufficient money, but also, efficient money. Strategies like tax-loss harvesting are rarely flashy. They don’t make headlines or dominate cocktail party conversations. But over time, they can quietly save thousands—or even tens of thousands—of dollars in taxes. And for business owners who already juggle complex financial lives, those efficiencies can make a meaningful difference.
Now What?
Tax-loss harvesting isn’t a loophole or a gimmick. It’s a legitimate strategy built into the tax code that allows investors to offset gains and manage taxable income more efficiently. For business owners, the potential benefits can extend beyond a single year, creating flexibility for future investment decisions or major financial events like exit strategies or expansion.
However, it’s also a strategy filled with technical details—particularly when it comes to the wash sale rule and maintaining proper portfolio allocation. That’s why the smartest approach isn’t trying to DIY your way through the tax code. Instead, work with an experienced financial advisor who understands how tax-loss harvesting fits into the broader picture of your investments, your business income, and your long-term financial plan. Because when markets inevitably throw a few lemons your way, it’s nice to know someone is there to help turn them into lemonade.
