A Guide to Tax-Loss Harvesting

Phase 1: The Global Portfolio Audit—Are You Harvesting in the Right Country?

A world-class investment strategy begins not with a trade, but with a critical assessment of your global landscape. Before executing any plan, the CFO of a multinational enterprise must first establish a clear, compliant foundation. For you, the Global Professional, this means confronting a foundational truth: where you are a tax resident is often more important than what you sell. The effectiveness of any U.S.-based tax-loss harvesting plan hinges entirely on your status abroad, making this audit the essential first phase.

• Map Your Financial Universe: Your first action is to build a comprehensive inventory of every taxable investment account you hold across all jurisdictions. This isn't just good housekeeping; it's a critical risk management exercise for your "Business-of-One." Cataloging your Schwab account in the US, a Degiro account in the EU, and a local brokerage in Singapore provides the clarity needed to mitigate serious compliance risks, especially related to Foreign Bank and Financial Accounts (FBAR) reporting. If the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the year, you have a strict FBAR filing obligation. Failure to comply can result in severe penalties—a risk no prudent CFO would ignore.
• Identify Your Primary Tax Residency: As a U.S. citizen, you are always subject to U.S. taxation on your worldwide income. However, your country of residence also has a claim. Determining your primary tax residency is paramount because it dictates which country has the primary right to tax your capital gains. The rules differ dramatically by location. For example, are you a tax resident in a country with a favorable regime like Portugal's Non-Habitual Resident (NHR) program, or one with more complex wealth taxes like Spain? The answer will fundamentally alter your optimization strategy.
• Uncover Hidden Risks in Tax Treaties: Many expats mistakenly believe a tax treaty is a simple shield against double taxation. The reality is far more nuanced. If you are considered a resident of both the U.S. and another country, tax treaties employ a series of "tie-breaker" rules to assign tax residency to a single jurisdiction. These rules examine factors like where you have a permanent home, your "center of vital interests" (personal and economic ties), and your habitual abode. An unfavorable determination could make you a tax resident of the foreign country, potentially nullifying the benefits of U.S.-based tax-loss harvesting or creating an unexpected foreign tax liability on U.S. gains.
• Establish a Baseline for Every Asset: Finally, for every asset you are considering for tax-loss harvesting, you must document its cost basis with precision. This is the non-negotiable starting point for navigating multi-currency complexity. You must record the asset's original purchase price in its original currency (e.g., EUR, GBP) and its equivalent in U.S. dollars using the exchange rate on the exact date of purchase. This meticulous record-keeping is the only way to accurately calculate capital gains or losses in USD, as required by the IRS, and build an unshakeable, audit-proof foundation for your strategy.

Phase 2: The CFO’s Execution Model—A System for Seizing Opportunity

With an audit-proof foundation in place, you can shift from assessment to action. A CFO’s real value emerges not just in planning, but in disciplined execution. This is where you move from theory to the systematic practice of converting market downturns into tangible tax assets. For the Global Professional, this requires mastering the nuances of cross-border transactions and maintaining a year-round state of readiness.

• Master the Multi-Currency Calculation: When you sell an asset purchased in a foreign currency, the IRS views it as two separate transactions, and both must be calculated in U.S. dollars. First, determine the capital gain or loss on the security itself by converting the original purchase price and the final sale price into USD using the exchange rates on those specific dates. Second, calculate the foreign exchange (FX) gain or loss from the currency fluctuation between the purchase and sale dates. This FX gain or loss is typically treated as ordinary income or loss. Ignoring this dual calculation is a frequent and costly compliance error that can attract unwanted IRS scrutiny.

• Implement the "Gruv Safe-Swap" Strategy: The primary rule to navigate in any tax-loss harvesting plan is the wash sale rule. This IRS regulation prevents you from claiming a capital loss if you purchase a "substantially identical" security within 30 days before or after the sale. While the IRS doesn't provide a precise definition of "substantially identical," the established best practice is to replace a sold ETF with one from a different provider that tracks a different, though highly correlated, index. This allows you to maintain your desired market exposure while legally banking the loss. Think of them as "harvesting partners."

• Use the Loss Hierarchy with Precision: The IRS has a strict sequence for deducting capital losses. You cannot simply apply them wherever you choose. The process must be methodical:

1. First, offset losses against gains of the same type. Short-term losses must first offset short-term gains, and long-term losses must offset long-term gains.
2. Next, if you have net losses remaining in one category, apply them against gains in the other. For instance, a net short-term loss can be used to offset a net long-term gain.
3. Finally, if you still have a net capital loss after offsetting all capital gains, you can deduct up to $3,000 of that loss against your ordinary income for the year ($1,500 if married filing separately). Any remaining loss above that limit can be carried forward to future tax years indefinitely.

• Leverage Volatility Year-Round: Effective tax optimization is not a frantic, last-minute activity in December. It is a continuous, year-round discipline. Market downturns are not just risks to be weathered; they are opportunities to be seized. As the CFO of your "Business-of-One," you should have a system to monitor your portfolio for harvesting chances. A simple but powerful technique is to set price alerts for key positions. When an ETF you hold drops by a predetermined amount (e.g., 10%), that alert is your signal to execute a trade and convert a paper loss into a valuable tax asset.

Phase 3: The Compliance & Reinvestment System—Bulletproof Your Records

Execution is meaningless without a system for compliance and record-keeping. This final phase integrates your harvesting activities into the broader operational rhythm of your "Business-of-One," ensuring you have an audit-proof file. A well-executed trade can be undone by sloppy paperwork, and as the CFO, your job is to secure the value you create.

• Integrate TLH with Your FBAR Monitoring: This is a subtle but critical discipline. While selling a security is not an FBAR event, the cash proceeds are. If those proceeds land in a foreign brokerage account, even temporarily, they count toward your aggregate balance. A few strategic harvesting transactions could easily push your total foreign account values over the $10,000 threshold, triggering a filing requirement you might otherwise not have. After every harvesting transaction, your first operational step should be to update your FBAR tracking sheet. This transforms compliance from a reactive scramble into a proactive, integrated part of your investment strategy.

• Create an "Audit-Proof" Transaction Log: Your primary defense in any audit is contemporaneous documentation. For every tax-loss harvesting trade, you must log the details in a dedicated spreadsheet—the official ledger for your "Business-of-One."

• Track Your Loss Carryforwards Diligently: If your net capital losses for the year exceed the $3,000 you can deduct against ordinary income, the remainder is not lost. It becomes a capital loss carryover—a valuable asset that you can carry forward indefinitely to offset future gains or income. Your transaction log should have a running tally of this asset. At the end of each year, calculate your total net loss, subtract the $3,000 used, and establish the new carryforward balance. Treating this number with the seriousness of a bank account balance ensures you never leave a valuable tax deduction on the table.

• Set a 31-Day "Wash Sale" Calendar Alert: The wash sale rule is an unforgiving tripwire. To avoid inadvertently nullifying your hard work, implement a simple, foolproof system. Immediately after you buy the replacement security, create two calendar alerts. The first is for 31 days out, labeled: "Wash Sale Window CLOSED for [Ticker Sold]." This is your green light to repurchase the original security if you choose. The second, set for 25 days out, can be a warning: "Approaching Wash Sale Window End for [Ticker Sold]." This simple automation enforces discipline and protects your harvested losses from a costly unforced error.

Can US expats use tax-loss harvesting?

Yes. US citizens are taxed on their worldwide income regardless of where they live, which means you can and should leverage tax optimization strategies in your US brokerage accounts. However, the net benefit hinges on your international tax situation. If you are a tax resident in a country that also taxes capital gains, the applicable tax treaty will determine which country has the primary right to tax those gains. Harvesting a loss to reduce your US tax bill provides little advantage if you simultaneously realize a gain that generates a higher local tax liability. Your strategy must be holistic.

How does tax-loss harvesting work with multiple currencies?

This is a mission-critical detail. The IRS requires a two-part calculation for any sale of an asset denominated in a foreign currency:

1. The Capital Gain/Loss: Calculate this on the security itself by converting the purchase and sale prices to U.S. dollars using the exchange rates on the exact dates of the transactions.
2. The Currency Gain/Loss: Separately, calculate the gain or loss on the currency fluctuation between the purchase and sale dates. This is typically treated as ordinary income or loss.

How does the wash-sale rule work with international ETFs?

The rule applies if you purchase a "substantially identical" security within 30 days before or after selling at a loss. The IRS definition is intentionally vague, so you must operate with a margin of safety. Selling a US-listed ETF that tracks the MSCI EAFE Index and immediately buying a Dublin-listed ETF that tracks the exact same index would almost certainly be flagged as a wash sale. The safest approach is to replace the sold ETF with one that tracks a different, though similar, index from a different provider.

What are the best replacement ETFs to avoid the wash sale rule?

The key to a compliant "safe swap" is to change both the ETF provider and the underlying index. While two funds may offer exposure to the same market segment, they are built on different proprietary indexes, making them not "substantially identical." Here are some reliable "partner" pairings:

Does tax-loss harvesting affect FBAR?

Not directly, but the indirect consequences are significant. The act of selling a security is not a reportable FBAR event. However, the cash proceeds from the sale, if they land in a foreign bank or brokerage account, absolutely count toward your aggregate balance. The filing threshold is triggered if the total value of all your foreign accounts exceeds $10,000 at any point during the year. A few large harvesting transactions could easily push you over that critical threshold, creating a filing requirement where one didn't exist before.

Conclusion: You Are the CFO of Your Freedom

The complexities of cross-border finance—from FBAR thresholds to the nuances of the wash sale rule—are not obstacles to be feared. They are simply the operating environment for which a Global Professional must be equipped. Mastering them is the very definition of professionalism in your context.

This strategy is far more than an opportunistic tactic to lower a tax bill. When executed with systematic, year-round discipline, tax-loss harvesting becomes a powerful engine for risk management and long-term wealth creation. By implementing this 3-Phase Framework, you fundamentally change your relationship with market volatility.

• You move from a passive investor who reacts to downturns, to a strategic CFO who sees them as opportunities to act.
• You convert abstract "paper losses" into a tangible financial asset—capital losses that can be deployed to offset gains or up to $3,000 in ordinary income annually, with the rest carried forward indefinitely.
• You build a robust, defensible system for every action, from the initial residency audit to the final audit-proof transaction log.

This system is your shield. It protects you from the unforced errors and compliance anxieties that plague so many professionals operating globally. It provides a repeatable process that builds confidence, allowing you to remain invested while systematically improving your after-tax returns.

You chose this path for the autonomy and freedom it provides. That freedom is built and defended by the quality of your decisions and the rigor of your systems. Wielding sophisticated tools like tax-loss harvesting with confidence is how you protect what you have built. It is the work of a true CFO.