Tax-Loss Harvesting & Asset Location: Smart Ways to Cut Taxes in 2026

Imagine you have a garden full of fruit trees. Some of the trees are strong and growing lots of fruit. Some of them are weak and not giving much fruit at all. If you want the whole garden to do better, you might trim the weak trees and plant better ones in the right spots.

When you invest money, you can think of your investment “garden” the same way. Two smart strategies — tax-loss harvesting and asset location — help you trim losses and plant your money where it will grow best, while also saving on taxes.

What is Tax-Loss Harvesting?

Tax-loss harvesting means selling investments that have lost value so you can use those losses to offset gains in other investments. In simple words: you turn something that went down into something useful.

Here’s how it works:

• Suppose you bought a stock for $10,000. Now it’s worth $7,000 — that’s a $3,000 loss.
• You also sold another investment and made a $3,000 gain.
• You sell the losing stock: you lock in the $3,000 loss.
• Because you have a $3,000 gain and a $3,000 loss, they cancel out. You pay less tax.
• If your losses are bigger than your gains, you may be able to use up to $3,000 of the extra loss to reduce your ordinary income, and any leftover losses can be carried forward to future years.

That means your tax bill can go down, and you keep more of your money working for you.

What Must You Be Careful About?

There’s an important rule called the wash-sale rule. It says: if you sell an investment at a loss and buy the same or a “substantially identical” investment within 30 days before or after, you cannot claim that loss for tax purposes.

So in our garden example: you can’t pull out the weak apple tree and immediately plant the exact same weak apple tree and claim you pulled out the loss. You have to wait or plant a different kind of tree.

Also:

• Tax-loss harvesting only works in taxable accounts (not in retirement tax-deferred or tax-free accounts).
• Timing matters: you want to make sure the sale and replacement (if you rebuild) settles within the right tax year if you want the benefit for that year.

What is Asset Location?

After you’ve trimmed and planted, you need to decide where each tree should go. In investing, asset location means putting different types of investments into different types of accounts so that your taxes are lower.

Here’s the idea: you have three major account types:

1. Taxable account (like a standard brokerage account) — you pay taxes on interest, dividends, and gains when you sell.
2. Tax-deferred account (like a Traditional IRA or 401(k)) — you don’t pay taxes now; you pay when you withdraw.
3. Tax-free account (like a Roth IRA) — you pay taxes now, but withdrawals later are often tax-free.

By placing investments in the “right” account, you reduce the tax drag on your portfolio. For example:

• Investments that generate a lot of ordinary income, like bonds or REITs, are better in tax-deferred accounts because ordinary income tax rates are higher.
• Investments that mostly grow in value and yield qualified dividends or long-term gains (which are taxed at lower rates) may be fine in a taxable account.

Why These Strategies Matter Together

When you combine tax-loss harvesting with smart asset location, you can make your portfolio more tax efficient and keep more of what you earn.

• Tax-loss harvesting helps you reduce taxes right now (or shortly) by using losses.
• Asset location helps reduce taxes over the long term by placing investments where they will face the lowest tax burden.

Together: you’re harvesting losses when it makes sense and placing your assets smartly so future growth isn’t eaten away by taxes.

How to Do This in Simple Steps

Step 1: Review your portfolio in your taxable account

Check if you have investments that are performing poorly (they’re below what you paid). Those are candidates for tax-loss harvesting.
If you also have realized gains in the same year, you may use those losses to offset the gains. If losses exceed gains, remember the $3,000 ordinary income offset rule.

Step 2: Mind the wash-sale rule

If you sell something at a loss, don’t buy the same or substantially identical security within 30 days before or after. If you do, you lose the benefit of the loss.

Step 3: Check your account types

List your taxable accounts, tax-deferred accounts, and tax-free accounts. See where you hold bonds, REITs, stocks, and growth funds.

Step 4: Place your investments smartly

• Put bond funds, high-interest investments, and things that pay out lots of regular income into tax-deferred accounts.
• Put growth stocks, index funds, and things you expect to hold a long time in taxable or tax-free accounts, depending on your situation.
• Make sure your asset allocation (how much is in stocks vs bonds) is right first; then asset location is the next filter.

Step 5: Monitor and rebalance

Over time, things change. You may need to sell some assets, buy others, or rebalance to maintain the right mix. During that process, you can revisit both tax-loss harvesting and asset location.

Example to Make It Real

Let’s say Sarah has the following:

• A taxable brokerage account with stocks and bonds.
• A Traditional IRA.
• A Roth IRA.

In the taxable account: she has a bond fund that pays high interest — that interest gets taxed at ordinary income rates. She also has a growth stock fund that she plans to hold for many years.

In the IRA: she also has some bonds. In the Roth: she has the growth stock fund.

By doing asset location: she might move high-interest bond holdings into the tax-deferred IRA (so the high-tax income is sheltered). She keeps growth stocks in the taxable or Roth account where lower taxes apply later.

Now suppose the growth stock in the taxable account dropped in value. She sells it for a loss and uses that loss to offset a gain she had earlier in the year from another sale. That’s tax-loss harvesting in action.

Who Should Use These Strategies?

• If you have taxable investment accounts (not only retirement accounts).
• If you have gains from investments, or expect to hold investments a long time.
• If you have a mix of investment types (stocks, bonds, funds) and different account types.
• If you’re thinking about long-term tax efficiency (not just what you pay this year).

Even if you’re not super wealthy, these strategies can help you keep more of what you earn and give you more control.

Things to Keep in Mind

• These strategies don’t change your investment risk: you still need good investments and the right mix of stocks and bonds.
• Don’t pick an investment solely for tax reasons; tax efficiency is a bonus, not the only reason.
• Tax laws can change, so review your strategy from time to time.
• Always keep good records — cost basis, purchase dates, and account types.
• If you’re unsure, talk to a financial advisor or tax professional.

Final Thoughts

Tax-loss harvesting and asset location are like two smart gardening tools for your investment garden. One helps you remove the weak trees (losses) and use them wisely. The other helps you plant the right trees in the right place (account type plus asset type) so your garden grows with fewer tax weeds.

By using both strategies together, you can help your investments grow more efficiently — not just before tax, but after tax. And that means you keep more of your hard-earned money working for you and your future.