How Tax Loss Harvesting Can Help Offset Equity Comp Taxes
One of the biggest reasons employees hold onto their company stock longer than they should? Taxes.
It’s true, taxes are a key part of the conversation when it comes to selling RSUs or exercising stock options. But they shouldn’t drive the decision. The tax tail shouldn't wag the dog.
There are several ways to manage taxes when dealing with equity comp, and one especially powerful tool is tax loss harvesting, especially if you also invest in a taxable brokerage account.
What Is Tax Loss Harvesting?
Tax loss harvesting is the practice of selling investments at a loss to offset gains elsewhere in your portfolio or even reduce your taxable income.
While no one wants to sell at a loss, doing so strategically can be beneficial, especially when used to offset gains from equity compensation that’s grown substantially.
How Does It Work?
Tax loss harvesting can only be done in taxable brokerage accounts, not in IRAs or 401(k)s. Here’s how it works:
You sell an investment at a loss in your taxable account.
That loss can offset capital gains from other sales including appreciated employer stock.
If you don’t have any gains to offset, you can deduct up to $3,000 of capital losses against your ordinary income (like wages or IRA withdrawals).
If your loss is greater than $3,000, the excess can be carried forward to future tax years.
When It Makes Sense
Tax loss harvesting becomes especially valuable when:
You have a large taxable account (generally $200,000 or more)
You’re facing large tax bill from stock option exercises or RSU sales
You don’t need to have equity compensation to benefit from tax loss harvesting, but if you do, it can lower the cost of diversifying away from concentrated stock positions.
Watch Out for the Wash Sale Rule
A common pitfall is the wash sale rule. This IRS rule says that if you sell a security at a loss and then repurchase the same or a "substantially identical" security within 30 days before or after the sale, the loss is disallowed.
Here’s what that means:
You can’t buy back the same stock within 30 days before or after selling it at a loss
The total restricted window is 61 days
If a wash sale occurs, the disallowed loss is added to your new cost basis, so it’s not lost, just deferred
To avoid this, you can:
Stay in cash for a bit (if you're okay with being out of the market)
Buy a similar but not “substantially identical” investment (e.g., a different ETF or sector fund)
The RSU Problem
If your RSUs have lost value, you might think tax loss harvesting is a smart move, and it could be.
Unless your RSUs vest monthly, you may run into a problem.
The IRS treats RSU vesting as a “purchase” for wash sale purposes. That means if you’re receiving new shares every 30 days, it’s nearly impossible to find a window where you can sell at a loss and not trigger the wash sale rule.
Here’s the silver lining:
If you sell more shares than are vesting in a given month, you can still harvest some losses. The wash sale rule only disallows the portion of the loss equal to the value “purchased” via vesting. So, while your tax benefit might be reduced, it’s not necessarily gone.
Final Thoughts
Tax loss harvesting is a smart, proactive strategy that can help reduce your tax bill, especially when paired with equity compensation strategies.
But it requires careful planning and awareness of key rules like the wash sale rule. And if you’re regularly receiving RSUs or exercising options, the timing and tactics matter even more.
If you’re unsure how to apply tax loss harvesting in your situation, or want help building a plan to reduce taxes from your equity comp, consider working with a financial advisor who understands the nuances of equity compensation.