Introduction Every investor experiences market downturns. The question is not whether your portfolio will ever go into the red it is whether you are using those losses strategically to reduce your tax liability. Tax loss harvesting is one of the most underutilised and powerful tools in an investor’s tax planning arsenal. In Day 2 of […]
Every investor experiences market downturns. The question is not whether your portfolio will ever go into the red it is whether you are using those losses strategically to reduce your tax liability. Tax loss harvesting is one of the most underutilised and powerful tools in an investor’s tax planning arsenal.
In Day 2 of our 15-part series on cross-border tax planning, we dive deep into how tax loss harvesting works, who benefits most, and how investors with India-US or international portfolios can use it to their advantage in 2026
Tax loss harvesting is the process of intentionally selling securities that have declined in value to realise a capital loss, which can then be used to offset capital gains and reduce your overall tax bill.
The key insight: You are not permanently exiting your investment thesis. You are converting paper losses into actual tax deductions and then often reinvesting in a similar (not identical) security to maintain market exposure.
– You bought 100 shares of Company A at ₹500 each = ₹50,000 investment
– Current value: ₹35,000 (a ₹15,000 unrealised loss)
– You sell and realise the ₹15,000 loss
-That ₹15,000 can offset capital gains you made elsewhere
Under Indian tax law, capital losses can be carried forward and set off as follows:
– Short-term capital loss (STCL) can be set off against both short-term and long-term capital gains
– Long-term capital loss (LTCL) can only be set off against long-term capital gains
– Unabsorbed capital losses can be carried forward for 8 assessment years
– Returns must be filed on time to carry forward losses
For equity investments in India:
– Short-term capital gains (held < 12 months): Taxed at 20% (FY 2026)
– Long-term capital gains (held > 12 months): Taxed at 12.5% above ₹1.25 lakh exemption
For US taxpayers and NRIs with US investment accounts:
– Short-term capital gains (held < 12 months): Taxed as ordinary income (up to 37%)
– Long-term capital gains (held > 12 months): Taxed at 0%, 15%, or 20% depending on income
– Capital losses can offset capital gains dollar-for-dollar
– If losses exceed gains, up to $3,000 per year can offset ordinary income
– Excess losses carry forward indefinitely
The Wash Sale Rule (USA)
The IRS has a critical rule: You cannot buy the same or substantially identical security within 30 days before or after the sale (the wash sale window). Violating this rule disallows the loss deduction.
Strategy: Replace the sold security with a similar — but not identical — investment. For example, sell one S&P 500 ETF and buy a different S&P 500 ETF from another provider.
Note: India does not currently have a formal wash sale rule, but the CBDT monitors tax avoidance transactions.
For NRIs and investors with both Indian and US portfolios, tax loss harvesting becomes more sophisticated:
1. Jurisdictional matching: Losses realised in India can only offset Indian gains. US losses offset US gains. Cross-border netting is generally not permitted without DTAA analysis.
2. Currency gains/losses: For NRIs, forex movements between INR and USD can create additional taxable events. These must be tracked separately.
3. DTAA implications: Under the India-US DTAA, capital gains on shares may be taxed in both jurisdictions (subject to credits). Tax loss harvesting in one country may not reduce tax in the other.
4. PFIC rules: US persons holding Indian mutual funds may face Passive Foreign Investment Company (PFIC) rules, which severely limit loss harvesting strategies.
Practical Tax Loss Harvesting Checklist for 2026
Before financial year end (March 31, 2026 for India; December 31, 2026 for USA):
[ ] Review your entire portfolio for unrealised losses
[ ] Identify gains already realised during the year
[ ] Calculate net capital gain position in each jurisdiction
[ ] Identify loss candidates for harvesting
[ ] Check wash sale windows (USA) before selling
[ ] Identify replacement securities to maintain market exposure
[ ] Execute sales before year-end deadline
[ ] Document all transactions with cost basis records
[ ] File returns on time to preserve loss carry-forwards
1. Harvesting losses without a reinvestment plan — exiting the market entirely and missing the recovery
2. Triggering wash sale violations by repurchasing the same ETF within 30 days
3. Ignoring transaction costs — brokerage fees may exceed the tax benefit for small positions
4. Harvesting losses in tax-advantaged accounts (IRA, EPF, PPF) where the tax benefit does not apply
5. Failing to carry forward losses by not filing the return on time
Tax loss harvesting is not just a theoretical strategy — it is a practical, year-round discipline that can meaningfully reduce your effective tax rate on investment income. For high-income investors, NRIs, and those with cross-border portfolios, the compounding benefit over 5-10 years can be substantial.
The key is systematic review, not panic selling. Plan your harvesting calendar in advance, understand the rules in each jurisdiction, and always work with a tax advisor who understands both Indian and US capital markets.
In Day 3, we cover Double Taxation Avoidance Treaties (DTAA) — how they work, which countries they protect you in, and how to claim treaty benefits on your cross-border income.
Moiz Ezzi is a Certified Public Accountant (CPA) and Chartered Accountant (CA) specialising in cross-border tax advisory for multinationals, NRIs, and non-US founders with India-US and India-global operations. He advises clients across transfer pricing, international holding structures, DTAA planning, and entity structuring.
Connect with Moiz Ezzi on LinkedIn for weekly cross-border tax insights.
