Selling at a Loss Isn't Losing. For Tech Employees, It's a Tax Strategy.

What if the investments that are down in your portfolio are actually one of your most valuable tax planning tools?

Most people look at a position that's lost value and see a problem. A mistake. Something to hold until it "comes back." The idea of selling at a loss feels like admitting defeat.

But for a Bay Area tech employee with RSUs vesting at a high marginal rate, a portfolio position sitting at a loss isn't just a disappointment. It's an asset, one that can be used deliberately to reduce the tax bill that arrives every time your company stock vests.

That's tax-loss harvesting. And for equity-heavy portfolios at high income levels, it's one of the most practical and underused tools in the financial planning toolkit.

The misconception worth clearing up first

Selling an investment at a loss doesn't mean you've permanently lost that money. It means you've recognized the loss for tax purposes while keeping your portfolio invested in the market.

The key word is recognized. An investment can be down 20 percent and you can still be fully invested in a similar asset, maintaining your market exposure, while simultaneously generating a tax loss that offsets income elsewhere in your financial picture.

That's the core of tax-loss harvesting. It's not about abandoning your investment strategy. It's about being deliberate about when and how you realize losses so they do the most good.

How capital losses work

When you sell an investment for less than you paid for it, you generate a capital loss. That loss can be used to offset capital gains elsewhere in your portfolio, dollar for dollar. If your losses exceed your gains, you can use up to $3,000 of the remaining loss to offset ordinary income in the same tax year. Any losses beyond that carry forward to future years indefinitely.

Here's where it gets particularly useful for tech employees. Capital losses offset capital gains first. But they also offset ordinary income up to that $3,000 annual limit, and any excess carries forward to reduce future capital gains or ordinary income in subsequent years.

For someone with a large portfolio and ongoing RSU vests generating ordinary income year after year, a systematic approach to harvesting losses builds a stockpile of loss carryforwards that can be deployed strategically over time.

Why this matters specifically for RSU-heavy portfolios

Tax-loss harvesting is valuable for any investor, but it's particularly powerful for tech employees for two reasons.

The first is the income level. At a combined marginal rate of 42 to 45 percent as we covered in a previous issue of Vested, every dollar of ordinary income offset by a capital loss carry

forward saves you 42 to 45 cents. That's a meaningful return on a deliberate tax planning decision.

The second is the portfolio composition. Tech employees who have been systematically selling RSUs and reinvesting the proceeds in a diversified portfolio tend to accumulate positions across a range of assets over time. In any given year, some of those positions will be up and some will be down. A portfolio that's growing overall can still contain individual positions sitting at a loss, and those losses have value if you harvest them intentionally rather than waiting for them to recover.

The combination of high ordinary income from RSU vests and a diversified portfolio with harvestable losses creates an opportunity that most tech employees aren't fully taking advantage of.

The wash sale rule: the one thing you need to know

Tax-loss harvesting has one significant constraint: the wash sale rule.

If you sell an investment at a loss and buy the same or a substantially identical investment within 30 days before or after the sale, the IRS disallows the loss. You can't sell an S&P 500 index fund, immediately buy the same S&P 500 index fund, and claim a tax loss. The rule exists specifically to prevent people from generating paper losses without actually changing their investment position.

The 30-day window applies in both directions. Buying the replacement investment 29 days before the sale triggers the wash sale rule just as buying it 29 days after would.

The practical solution is to replace the sold investment with a similar but not substantially identical one. If you sell a total market index fund at a loss, you might replace it with a large-cap index fund tracking a different index. You maintain similar market exposure while keeping the loss valid for tax purposes. After 31 days, you can switch back to your original investment if you prefer.

For individual stocks, the wash sale rule is more straightforward. Selling shares of one company and buying shares of a different company doesn't trigger the rule, even if both companies are in the same industry.

How it applies to your company stock specifically

One question that comes up frequently: can you harvest losses on your company's RSUs?

The answer is yes, with an important nuance.

RSUs are taxed as ordinary income at vest. The cost basis for your shares is the fair market value on the vest date. If the stock declines after vesting and you sell at a price below that vest-date value, you have a capital loss.

That loss can be harvested just like any other capital loss. But the wash sale rule applies here too. You can't sell your company stock at a loss and immediately buy it back within the 30-day window. For most employees following a systematic sell strategy, this isn't an issue since the goal is to diversify out of the stock anyway. But it's worth knowing if you're considering selling some shares at a loss AND you are vesting new shares within the 30 day window.

A practical example

Here's how this plays out in a real portfolio.

A tech employee vests $120,000 in RSUs in a given year. That income is taxed at their full marginal rate, federally, at the state level, and including payroll taxes. The combined tax on the vest is significant.

Separately, they hold a diversified portfolio that includes a position in an international equity fund purchased two years ago. That position is currently sitting at a $40,000 loss.

By harvesting that $40,000 loss, they can offset $40,000 of capital gains elsewhere in the portfolio, or carry the loss forward to offset future capital gains from selling more RSUs in subsequent years. At a combined capital gains rate that includes the NIIT and California's ordinary income treatment, a $40,000 loss carryforward has real dollar value.

This isn't a one-time event. A systematic approach to harvesting losses across a growing portfolio builds a loss carryforward balance that compounds in value over time, particularly for someone with ongoing RSU income at high marginal rates.

When tax-loss harvesting makes the most sense

Tax-loss harvesting is most valuable when the following conditions are present:

Your marginal tax rate is high. At 42 to 45 percent on ordinary income, the value of every dollar of loss is significant. At lower income levels the benefit is still real but smaller.

You have ongoing capital gains or ordinary income to offset. For a tech employee with regular RSU vests, this condition is almost always met.

Your portfolio has positions sitting at a loss. This is normal in any diversified portfolio over time, even one that's growing overall. Market volatility creates harvesting opportunities regularly.

You have a long time horizon. The benefit of carrying losses forward compounds over time. Someone early in their career with 20 or 30 years of ongoing equity income ahead of them gets more value from building a loss carryforward balance than someone approaching retirement.

What this is not

A few things worth being clear about.

Tax-loss harvesting is not a strategy for selling poor investments and calling it tax planning. The investment decision and the tax decision should be made separately. If you're harvesting a loss, you should be replacing the sold investment with something similar so your portfolio stays on track. If you wouldn't own the replacement investment on its own merits, that's a different conversation.

It's also not a strategy that eliminates taxes. It defers and reduces them. Losses harvested today reduce your tax bill today or in the future, but the replacement investments you buy will eventually be sold, and those gains will be taxable. The benefit is in the timing and the rate, paying taxes later and at potentially lower rates is genuinely valuable, but it's not the same as not paying taxes at all.

And it's not something that requires a down market. Individual positions go down in any market environment. A portfolio that's up 15 percent overall can still contain positions sitting at meaningful losses that are worth harvesting.

The bottom line

For a Bay Area tech employee with RSUs vesting at high marginal rates and a growing diversified portfolio, tax-loss harvesting is not a sophisticated edge case. It's a practical, repeatable tool that should be part of the annual financial planning conversation.

The combination of high ordinary income, ongoing equity compensation, and a diversified portfolio with harvestable losses creates an opportunity that most people leave on the table simply because they haven't been shown how to use it.

If you've never reviewed your portfolio specifically for tax-loss harvesting opportunities, year-end is the natural time to do it, but the right time is any time the opportunity exists.