A Complete Guide to Tax-Loss Harvesting for US Expats

Although everyone hopes their investments will increase in value, it’s possible for them to dip below their purchase price. Even if that’s not ideal, you may be able to use your losses to your advantage. Tax-loss harvesting is a tax strategy that allows taxpayers to claim losses that reduce their tax liability — potentially resulting in a lower tax bill.

But how exactly does tax-loss harvesting work, who is it right for, and what do expats need to know about it? We’ll go over all of those topics and more below.

What is tax-loss harvesting?

Tax-loss harvesting is a strategy in which you sell certain assets at a loss to offset capital gains or other income. Let’s break down exactly what this means:

Capital gains taxes

The US government imposes capital gains taxes on the sale of profitable assets (e.g. stocks, real estate, bonds, cryptocurrency). To calculate your gain, subtract the asset’s cost basis (the purchase price plus any associated acquisition costs or improvements) from the sale price.

Capital gains are taxes at two rates: short-term and long-term.

Short-term capital gains rates

Short-term capital gains are taxed as ordinary earned income: from 10% to 37%, depending on your overall taxable income.

Long-term capital gains rates

Long-term capital gains are taxed at rates of 0%, 15%, or 20%, depending on your filing status and overall taxable income:

Single	Married filing jointly	Married filing separately	Head of household	Tax rate
$0 – $47,025	$0 – $94,050	$0 – $47,025	$0 – $63,000	0%
$47,026 – $518,900	$94,051 – $583,750	$47,026 – $291,850	$63,001 – $551,350	15%
$518,901+	$583,751+	$291,851+	$551,351+	20%

_{Source: Nerdwallet}

As you can see, long-term capital gains tax rates are often significantly lower than short-term capital gains tax rates — which can reach up to 37% for higher-income earners. Additionally, for individuals with significant investment income, the Net Investment Income Tax (NIIT) may apply, adding 3.8% to the applicable rate..

Example: In 2012, Maya bought $10,000 worth of stock in Company A. In 2024, she sold it for $60,000. Her profit from that sale was $50,000 ($60,000 – $10,000). The rest of Maya’s taxable income for the year is $140,000, making her total taxable income $190,000 ($50,000 in capital gains + $140,000 in other taxable income).

As a single filer, Maya falls into the 15% long-term capital gains tax bracket. Therefore, she owes:

• $7,500 in taxes on her capital gains ($50,000 x 0.15).

Maya avoids short-term capital gains tax, which would have taxed her gains at her ordinary income tax rate, saving her thousands in taxes. 

Capital losses

While the IRS taxes you on capital gains, they also allow you to offset your tax liability to a certain extent by claiming capital losses. Capital losses fall into two different categories:

• Realized losses: The loss you incur after selling an investment for less than its cost basis
• Unrealized losses: The decrease in value of an unsold asset

You can only claim a capital loss on realized losses. You don’t need to report — and can’t claim — unrealized losses. 

If you do incur realized losses, you may be able to claim a certain amount on your tax return to reduce your overall tax liability. Realized losses that are eligible for deduction in a given year are called recognized losses.

Tax-loss harvesting allows you to use realized losses to offset the capital gains taxes you face on profitable asset sales.

How does tax-loss harvesting work?

Tax-loss harvesting isn’t quite as simple as deducting your realized losses from your tax bill — there are a few limits on how much you can claim. Here are a few essential tax-loss harvesting rules to keep in mind:

Offsetting capital gains

You can claim any loss in the tax year against any capital gain in the tax year, thereby reducing the amount of capital gains subject to taxation. Let’s revisit Maya, who had $50,000 in capital gains from selling stock in Company A. 

Say Maya also bought stock in Company B in 2018 for $7,000. After several years of underperformance, she decides to sell her shares in Company B for $2,000 in tax year 2024, realizing a loss of $5,000.

By using tax-loss harvesting, Maya can offset her $5,000 loss against her $50,000 gain, resulting in a gain of only $45,000. If we refer back to the long-term capital gains tax rates above, we can see that $45,000 of capital gains as a single filer falls into the 0% tax bracket, meaning she owes no capital gains tax.

Compare this to the $7,500 she would have paid without selling the underperforming asset, , and it’s easy to see why she chose a tax-loss harvesting strategy.

Deducting loss against other income

If you don’t have any other capital gains — or if your losses exceed your capital gains — you can deduct up to $3,000 of your capital loss against your other income.

Example: Matt was gifted stock in Company C in 2018 by his grandfather, who paid $40,000 for it. In 2024, Matt sells the stock for $35,000, realizing a $5,000 loss. Since he has no other capital gains, he can deduct $3,000 of this loss from his overall earned income of $120,000 in 2024, reducing his taxable income to $117,000.

The remaining $2,000 of unused losses will carry forward to the 2025 tax year, where they can offset future capital gains or be deducted against other income, subject to the same $3,000 annual limit.

Carrying loss forward

Fortunately, if you have more than $3,000 of loss to claim in a given tax year, you can carry the remaining loss forward to future tax years indefinitely. Come 2025 or later, Matt can deduct $2,000 from his overall taxable income or offset any capital gains income he has by $2,000.

Replacing the assets sold

To maintain a balanced portfolio, some choose to re-invest the capital loss from underperforming assets into higher-performing assets. 

While this is generally allowed, you cannot buy the same asset or “substantially identical security” within 30 days before or after the sale if you want the tax benefits of the loss. This creates a 61-day window: 30 days before the sale, the day of the sale, and 30 days after the sale.

Sales that violate this 61-day window are called “wash sales,” and are not deductible for tax purposes. Attempting to claim losses on wash sales, failing to report wash sales, or otherwise misreporting wash sales may raise red flags with the IRS.

Matt, for example, would not be allowed to deduct the loss if he had purchased additional shares in Company C 30 days before he sold them at a loss. He also couldn’t purchase shares in Company C on the day of, or within 30 days after, selling them at a loss.

There are a few situations in which you need to be particularly wary of violating the wash-sale rule, including when you:

• Have company stock that regularly vests
• Set up a recurring investment
• Buy and sell shares in Exchange Traded Funds (ETFs) or mutual funds within the 61-day window (the IRS may consider ETFs or mutual funds substantially identical to one another, even if they’re not the same one you sold)

Risks & considerations

Just because you can utilize tax-loss harvesting doesn’t necessarily mean it’s the right financial strategy. It’s important to keep the following caveats in mind:

Long-term growth could outweigh short-term gains

Can short-term losses offset long-term gains? It’s certainly possible, if not probable. A well-balanced portfolio generally focuses on long-term growth rather than short-term cash-outs. When you sell an asset at a loss, you lose out on any gains that asset might see in the future.

Furthermore, selling off assets can throw off the balance of your portfolio. Before selling assets at a loss, you should make sure your investment plan is still aligned with your overall goals.

Timing is everything

It’s easier to tell whether tax-loss harvesting would be beneficial at the end of the tax year when you have a better understanding of your tax and reporting obligations. If you do move forward with tax-loss harvesting, you’ll need to think carefully about when you want to execute your asset sales, given that:

• The market can change rapidly
• Your income may increase or decrease in the future
• Assets with holding periods of over a year before sale are subject to more beneficial long-term capital gains tax rates

Foreign investments add a layer of complexity

While you can claim loss on international investments, you must first convert foreign currency into US dollars. When doing so, you’ll need to take the historical exchange rate into account on the days you acquired and disposed of your assets. Wise offers a great currency conversion tool on their website.

You’ll also need to factor in local tax laws if your assets are based in another country, or if you’re a tax resident in another country. In some situations, you may be better off claiming the Foreign Tax Credit (FTC) or tax treaty benefits than claiming losses.

Professional advice is a must

Before harvesting tax losses, you should always consult both a tax advisor and a financial advisor. Tax-loss harvesting can get complex, and there may be financial and tax implications that you haven’t considered. 

A licensed tax professional can help you assess the tax implications of tax-loss harvesting. If it ends up being a good fit, they can also file the forms necessary to claim tax losses and stay IRS-compliant. 

Finance professionals, on the other hand, can help you assess the impact of tax-loss harvesting on your investment portfolio. What’s more, they can directly sell the underperforming assets and recommend or purchase additional assets to replace the ones sold at a loss.

When should expats consider tax-loss harvesting?

Considering everything that we’ve discussed so far, here are a few situations in which the benefits of tax-loss harvesting may outweigh the risks: 

• When you have a significant amount of capital gains taxes: If you plan to sell an asset that will generate substantial capital gains, selling underperforming assets at a loss could bring your tax bill down to a more manageable level
• When it would bump you down a tax bracket: Tax-loss harvesting can sometimes move you into a lower capital gains and/or ordinary income tax bracket. For example, moving from a capital gains tax rate of 20% to 0% or an ordinary income tax rate of 35% to 24% can lead to serious savings
• When you expect to be in a higher tax bracket down the road: As your income increases, your tax rate typically does as well. If you anticipate earning more in the future — such as if you’re on a growth track at work or currently a student — you may be able to claim tax losses today and carry the excess forward to future tax bills

Of course, there are always exceptions to these generalities. As we mentioned earlier, you should always consult a financial advisor and tax advisor before moving forward with tax-loss harvesting. 

US tax forms associated with tax-loss harvesting

In addition to your main tax form (usually Form 1040), you may need to file the following forms when harvesting tax losses:

• Form 8949: For reporting the details of any capital gains you earned and/or losses you incurred from assets sold throughout the tax year
  • Tip: To fill out this form, reference Form 1099-B: the form that US financial institutions share with account holders at the end of the year
• Schedule D (Form 1040): For summarizing your capital gains/losses and calculating your net gain/loss
• Schedule 1 (Form 1040): For reporting self-employment income, foreign income, unemployment income, and adjustments to income

US expats who hold or sell foreign investments may also need to file:

• Form 8938: For reporting foreign assets valued at $200,000 on the last day of the tax year or $300,000 at any point during the tax year
  • Note: Reporting thresholds are different for married couples filing jointly and taxpayers living in the US
• FinCEN Form 114 (aka the Foreign Bank Account Report, or FBAR): For expats whose foreign financial account holdings exceed $10,000 

This is far from a comprehensive list, however. Depending on your circumstances — such as if you sold an asset to a foreign trust, or sold business property — you may need to file additional forms.

Get expert US expat tax advice with Bright!Tax

There’s no simple answer to the question, “Is tax loss harvesting worth it?” Tax-loss harvesting can certainly be a valuable tax strategy, but only in the right circumstances. To decide whether it’s right for you, it’s best to reach out to a licensed tax professional like the ones at Bright!Tax. 

Resources: 

1. Capital Losses and Tax
2. How Tax-Loss Harvesting Works for Average Investors