Year-End Tax Loss Harvesting for Small Business Owners

By Yarik Yarosh, CPA ·September 5, 2026 ·5 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Tax loss harvesting is the strategy of selling investments that have declined in value to generate capital losses, which offset capital gains or up to $3,000 of ordinary income per year ($1,500 if married filing separately). For small business owners, this strategy is particularly valuable because many have capital gains from selling business assets, real estate, or investment positions, and the $3,000 ordinary income offset directly reduces the high-rate income from their trade or business. The wash sale rule under IRC 1091 prevents repurchasing the same or “substantially identical” security within 30 days before or after the sale; violating it disallows the loss. Unused capital losses carry forward indefinitely, making losses harvested in any year usable in future years.

✓Key takeaway

Tax loss harvesting basics:

How it works:

Identify investments in your taxable brokerage account that have declined in value (unrealized losses)
Sell those investments, realizing the loss
The realized loss offsets capital gains dollar-for-dollar
If losses exceed gains, up to $3,000 of the excess offsets ordinary income
Any remaining excess carries forward to future years (indefinitely)
Reinvest the proceeds into a similar (but not substantially identical) investment to maintain portfolio exposure

What it offsets:

Short-term capital gains (taxed at ordinary income rates, up to 37%): offset first
Long-term capital gains (taxed at 0%, 15%, or 20%): offset second
Up to $3,000 of ordinary income ($1,500 MFS): offset third
Excess: carries forward indefinitely

The wash sale rule (IRC 1091):

Can’t buy a “substantially identical” security within 30 days BEFORE or AFTER the sale
The 30-day window is both directions: 30 days before the sale AND 30 days after
Total exclusion period: 61 days (30 before + sale day + 30 after)
“Substantially identical” means the same stock, bond, or very similar ETF/fund
Buying a different company in the same sector is fine (sell Apple stock, buy Microsoft)
Buying a different index fund that tracks a different index is fine (sell S&P 500 ETF, buy total market ETF)

What’s NOT substantially identical (safe replacements):

Different index: S&P 500 ETF sold, buy Total Stock Market ETF (different index)
Different fund family: Vanguard S&P 500 sold, buy Fidelity S&P 500 (this IS substantially identical, not safe)
Different sector: Tech ETF sold, buy individual tech stocks (NOT substantially identical)
Bonds: sell a specific corporate bond, buy a different issuer’s bond (not identical)

When to harvest:

November-December (year-end tax planning)
After a market correction (positions with large unrealized losses)
When offsetting a known capital gain (asset sale, real estate, K-1 gain)
Any time a position has a meaningful unrealized loss and a suitable replacement exists

Retirement accounts:

Tax loss harvesting applies ONLY to taxable accounts (brokerage accounts)
Losses in IRAs, 401(k)s, and other tax-deferred accounts cannot be used
Buying the same stock in an IRA within 30 days of selling at a loss in a taxable account triggers the wash sale rule

How does a small business owner use tax loss harvesting?

Hypothetical example

Round numbers. An S-Corp owner with $120,000 in K-1 income and $15,000 in capital gains from selling a rental property. Taxable brokerage account has several positions with unrealized losses.

Portfolio positions with unrealized losses:

Investment	Cost Basis	Current Value	Unrealized Loss
Tech Stock A	$20,000	$14,000	($6,000)
International ETF	$15,000	$11,000	($4,000)
Bond Fund	$10,000	$9,000	($1,000)
Total			($11,000)

Step 1: Sell all three positions (realize $11,000 in losses)

Step 2: Apply losses

Capital gains from rental property sale: $15,000
Offset with harvested losses: ($11,000)
Net capital gain: $4,000
Tax on $4,000 at 20% + 3.8% NIIT: $952

Without harvesting:

Capital gains: $15,000
Tax: $15,000 x 23.8% = $3,570

Tax savings from harvesting: $3,570 - $952 = $2,618

Step 3: Reinvest (avoid wash sale)

Sold	Replacement (not substantially identical)	Wait?
Tech Stock A	Different tech company or tech ETF	No wait needed (different security)
International ETF (MSCI EAFE)	Emerging Markets ETF (different index)	No wait needed
Bond Fund (Aggregate Bond)	Short-term Treasury ETF (different index)	No wait needed

The portfolio stays invested in similar asset classes, maintaining the investment strategy, while the $11,000 in losses offsets taxes.

If losses exceed gains: If the owner had $5,000 in capital gains instead of $15,000:

$11,000 in losses offset $5,000 in gains ($5,000 offset)
Remaining $6,000 in losses: $3,000 offsets ordinary income THIS year
$3,000 carries forward to next year
Tax savings this year: ($5,000 x 23.8%) + ($3,000 x 33%) = $1,190 + $990 = $2,180
Next year: $3,000 carryforward offsets another $3,000 of gains or ordinary income

The $3,000 ordinary income offset for business owners: $3,000 of ordinary income at the combined federal + SE + state tax rate for a business owner:

Federal: 24% bracket
Self-employment (if not S-Corp): 15.3%
State (average): 5%
Combined: up to 44%
$3,000 x 44% = $1,320 in tax savings from the ordinary income offset alone

For an S-Corp owner (no SE tax on the $3,000): $3,000 x 29% = $870.

Year-end timing strategy:

In November, review all taxable account positions for unrealized losses
Calculate expected capital gains for the year (business asset sales, K-1 distributions, real estate)
Harvest enough losses to offset those gains
Harvest an additional $3,000+ to offset ordinary income
Reinvest in non-identical replacements immediately
The portfolio stays fully invested; only the tax position changes

Automated tax loss harvesting: Robo-advisors (Wealthfront, Betterment) and some brokerage platforms offer automated tax loss harvesting:

The platform automatically identifies and sells positions with losses
Immediately reinvests in similar but non-identical ETFs
Tracks the wash sale window
Generates reports for tax filing
Fee: typically 0.25% of AUM (included in the robo-advisor management fee)
Estimated value: 0.5-1.5% of portfolio annually in tax savings, depending on market volatility

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Year-End Tax Loss Harvesting for Small Business Owners." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-tax-loss-harvesting-strategy

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.

Year-End Tax Loss Harvesting for Small Business Owners

How does a small business owner use tax loss harvesting?

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