Tax-loss harvesting on company stock: how $110,000 of losses shelters $107,000 of gains

Step 1: Gather the lots, the basis and the vest calendar

Many executives treat harvesting as a December chore. In practice it starts with a list of every company share you expect to sell over the next three years, each lot's basis, and the date you need the cash for withdrawals. Peggy is 63, a widowed senior vice president of sales at a consumer goods company, retiring this year, with one grown son (hypothetical, round numbers). Her $1.4 million 401(k) holds $600,000 of company stock at a $90,000 basis, so $510,000 of gain sits inside those shares before she sells any of them. Gather three things before deciding anything:

The slip at this step is missing the final vest or ESPP purchase that lands in your last weeks on payroll. It sits outside the brokerage statement, and months later it washes out a loss you thought was safe. If your current advisor already runs automated harvesting, Scotia Wealth Management checks how it is set up against your vest dates and leaves it alone when it works.

• The lot report from your custodian, showing purchase date, basis and holding period for every taxable lot.
• The 1099-R, if shares left a 401(k) under NUA; box 6 shows the net unrealized appreciation.
• The vest and ESPP purchase calendar from the equity plan portal, including the final offering period.

Step 2: Decide how much gain your withdrawals need each year

Sell the low-basis shares fast and be done: that's the usual instinct. The rule that matters is that capital gains stack on top of your other income in the year they are realized, so a retirement year that still includes a full salary is usually the worst year to realize large gains. Once the salary stops, withdrawals come from share sales and the taxable account, and estimated tax payments replace payroll withholding. Set a target gain per year, say $200,000 annually, before you pick any loss to harvest.

Gains also count in modified adjusted gross income for Medicare IRMAA, and income at 63 sets the premium at 65. For a single filer, staying near $109,000 of MAGI keeps the Part B premium at the 2026 standard of $202.90 a month instead of up to $689.90, according to the CMS schedule. A $200,000 gain breaks that line by a wide margin, which is why the target is a judgment call; we'd rather pay a surcharge for one planned year than let gains pile up in three. Which ages switch on which rules?

Step 3: Harvest losses against a staged sale, year by year

One big harvest in a bad year fixes everything, or so people assume. Losses cannot be carried back, only forward, so the order of gains and losses across years decides how much tax they actually remove. Peggy took her company shares out of the 401(k) under NUA and plans to fund withdrawals by selling them over three years. In year one, still on salary, she realizes only a $50,000 gain and harvests a $90,000 loss in a taxable index fund. The net loss is $40,000, so $3,000 offsets her salary and $37,000 carries forward.

Year two: a $200,000 gain, minus the $37,000 carryforward, minus a new $20,000 harvest, leaves $143,000 taxed. Year three has no losses left, so the full $200,000 is taxed. Across the three years that's $450,000 of gains and $110,000 of losses, with $343,000 taxed as gains. The $107,000 sheltered, at an illustrative 15 percent rate, saves $16,050; the other $3,000 of loss went against salary.

On the 1099-B, the loss sale shows as a sale at a loss with no wash-sale adjustment, provided she did it cleanly. She sells a broad index fund at a loss and buys a different fund, not substantially identical, the same day, so the money stays invested. The risk is real: the replacement fund and the company shares can both fall further, and any investment can lose value, principal included.

Before Scotia Wealth Management suggests selling anything, it works out how much the sale would add to that year's tax bill and checks that the loss will have gains to offset.

When does a final vest or ESPP purchase wash out the loss?

A loss on company shares is disallowed if you acquire the same stock in the 30 days leading up to the sale or the 30 days after it. RSU vests, ESPP purchases, dividend reinvestment and a spouse's purchases all count as acquisitions, so a loss sale is only safe when none of them falls in the 61-day window around it.

An employer's automatic ESPP purchase on the last pay date, 12 days after an executive sold older ESPP lots at a $15,000 loss, turned that loss into a wash sale. The $15,000 moved into the new shares' basis, and about $2,250 of tax at an illustrative 15 percent came due that year. Nobody noticed until the 1099-B arrived with an adjustment code.

You catch it by pulling the purchase and vest calendar before you sell, withdrawing from the ESPP before the final offering period closes, and switching dividend reinvestment to cash 31 days before the sale. The IRS also applies the rule across accounts: buying the same fund inside an IRA or rollover IRA within the window disallows the loss, and it is not added to any basis, so the loss is gone for good. That's why we check the IRA's purchases too.

Step 4: Put the dates in calendar order

Tax forms (1099-B, 1099-R and W-2) arrive early in the year, and estimated payments are due April 15, June 15, September 15 and January 15. Vest and ESPP dates are company-specific, so you read them off the portal. The trade date for a loss must fall by the last trading day of December to count for that year.

Harvesting in March, then selling more company shares in a later year, leaves the loss sitting as a carryforward. It still works, but it offsets gains at whatever rates apply then, and you've tied up the loss for months. A loss sale on the last trading day of December works too, but a vest scheduled for mid-January sits inside the 30-day window and can disallow it. Wrong order is the costliest: realizing a big gain in the salary year and harvesting the following year. The losses can't reach back, so that year's gain is fully taxed.

Use this decision rule this year. If you'll realize more than $3,000 of company stock gain and your taxable account holds positions below cost, harvest those losses in the same tax year. First confirm that no vest, ESPP purchase, dividend reinvestment or IRA buy of the same security lands within 30 days of the sale, before or after.

If you're married or the taxable account is smaller

Married couples filing jointly get the same $3,000 ordinary-income offset as single filers, and $1,500 each if married filing separately. A spouse's purchase of the same stock can trigger a wash sale, so both accounts belong on the calendar. A smaller taxable account simply produces fewer losses to harvest. Early retirees with low-income years before 65 gain the most; late retirees have fewer years to work with before RMDs begin at 75 for anyone born in 1960 or later.

What happens if markets, health or the law change after the sale?

If prices recover after the harvest, the replacement fund captures the rebound, and if they fall further you can harvest a second time. Keep one or two years of withdrawals in cash so you aren't selling company shares into a slump just to cover the month's bills.

Health matters more than people expect. Unused carryforwards can be used on the final return but do not pass to heirs, while shares held until death usually get a step-up in basis, apart from NUA, which keeps its gain. A serious diagnosis can make holding, not selling, the better move, and for someone who expects to hold until death, harvesting may not be worth the trouble.

Laws change too. Capital gains rates and IRMAA thresholds can move, so sell in stages and review the target each year; don't realize three years of gains at once. Be honest about the limits as well. Harvesting does nothing inside a 401(k) or IRA, and it adds little for someone already in the 0 percent long-term bracket. It also partly defers tax and only partly erases it, because the replacement fund starts with a lower basis.

The parts of a harvest you can run yourself, and where Scotia Wealth Management fits

You can track lots, sell a fund at a loss and buy a different index fund on your own. Matching the gain schedule to IRMAA lookback years, NUA shares and wash-sale windows across taxable accounts and IRAs is the part worth a review with Scotia Wealth Management, which checks what your current roadmap already does and changes only what is broken.