Stock market drops can reduce your tax bill by up to $3000—but watch the ‘wash trading’ rule

Tariff-induced market volatility has many investors and retirees anxious about the state of their retirement accounts and other holdings. One (slight) silver lining? You could get a break on your 2025 tax bill. That's because periods of volatility present an ideal opportunity for tax-loss harvesting, or selling select investments from a brokerage account at a realized loss to lower or eliminate taxes on other realized gains, says Tyler Horn, head of planning at Origin, a personal finance app. That could be gains from other stocks, real estate, or business sales.

Tax-loss harvesting is an often under-utilized strategy, despite significant possible benefits, Horn says.

"By strategically selling investments at a loss, investors can offset capital gains or even reduce taxable income by up to $3,000 per year," he says, citing the annual IRS limit (that's after losses offset gains). "Simultaneously, reinvesting in a similar asset allows them to take advantage of the market recovery."

Markets have been a chaotic run for the past week, as President Donald Trump introduced, added to, and then paused tariffs on many U.S. trading partners (those against China are a different story). It is too soon to know exactly what will happen with tariffs and the market, which is why many financial advisors say to take a "wait and see" approach with most of your financial planning.

Still, tax-loss harvesting can be a decent strategy when stocks are down. In fact, many planners were already advising their clients to look into it, as 2024 was a banner year for stocks, and tax-loss harvesting can help reduce your capital gains bill.

"Tax-loss harvesting is about timing," says Belinda Herzig, senior wealth strategist at BNY Wealth, noting it is a strategy that can be revisited throughout the year whenever there is volatility, not just at the end of the year in a last-ditch effort to save some money.

If you still have unused losses after offsetting all of the gains and $3,000 in income, you can roll them over to other tax years indefinitely. So if you sell some Tesla shares at a loss, for example, you can use those losses for years to come.

Heed the wash-sale rule

There's one thing to watch out for when it comes to tax-loss harvesting: The wash-sale rule. This basically means investors can't buy or sell the same investment or a "substantially identical" one in the 30 days immediately preceding or following the day you harvested losses.

If you do buy the same or a similar asset, the tax loss will be disallowed. It can make sense to work with a financial professional on these types of transactions to make sure you're not running afoul of it—or wait 30 days before making any other transactions.

This story was originally featured on Fortune.com