The Loss Bank

As a startup matures, one of the most common levers for employees is the tender offer: the company opens a window to sell a portion of vested equity and finally turn paper wealth into liquidity.

The catch is the tax bill. Often, the profit on that sale counts as a capital gain, which gets its own tax treatment. Hold the shares more than a year and the gain counts as long-term, which is taxed at a lower rate than salary, but even so, on a large sale, that bill becomes very real.

Tax-loss harvesting is one way to handle a large, unexpected taxable event like that. Most people, if they do it at all, treat it as a small year-end chore, something a robo-advisor runs in the background to shave a little off this year's taxes.

For anyone sitting on startup equity, that chore could be the key to unlocking something much larger. Repeated year after year, the losses pile into a loss bank and the day your equity turns into cash is exactly when you'll want one.

The Loss Harvesting Swap

Let's start just by looking closely at the basic move of tax loss harvesting because there's more to it than selling a loser and sitting in cash.

The full move is to sell something that's down, lock in the loss, and immediately buy something similar enough to keep your portfolio exposed to the same part of the market. You capture the loss without stepping out of the market.

A stock that's dropped is only a loss on paper. The IRS calls this an unrealized loss, and it counts for nothing on your taxes. The moment you sell, it becomes a realized loss, and only a realized loss can go on your return to reduce your income.

So selling is the move that makes a paper loss usable.

As an example, let's say you own Pepsi.

The portfolio as a whole still owns a large beverage company, but the tax return now carries an $800 realized loss. A loss you can actually use to reduce your reported income.

One rule isn't obvious at first: you can't sell Pepsi and immediately buy it back. That triggers the wash-sale rule, where the government treats it as if you never sold, so you can't claim the loss.

Selling Pepsi but buying Coke sidesteps it. The idea stays simple: swap the position, keep the exposure, bank the loss.

With that, the loss counts, and we want the loss.

But why?

What a Loss Is Worth

A capital loss gets spent in a set order. First, it cancels any capital gain you have, dollar for dollar. A dollar of loss erases a dollar of gain.

If your losses are more than your gains, up to $3,000 of any leftover can be deducted from your income that year.

But more importantly, anything still unused after that carries forward to future years, and never expires. So a loss you bank today can wait, years if it has to, for the gain you'll owe on tomorrow.

The Setup

Let's say Priya works at a late-stage AI company and has been investing in a normal taxable brokerage account.

Instead of buying index funds, she has been direct indexing into the S&P 500, buying the individual stocks that make up the index. At any given moment, some are up and some are down.

Every time a position drops, she harvests the loss, swaps into a similar stock, and keeps the portfolio invested in the same general categories of the market.

With a meaningful taxable portfolio, especially one taking in new money every paycheck, these losses add up faster than people expect.

So Priya's boring losses start to stack:

Priya didn't cancel a single gain in 2024 or 2025. She was quietly filling her loss bank, and the unused losses just waited for a gain to spend them on.

The Tender

Now the tender offer Priya had been expecting arrives, her company opens the window.

She sells $265,000 of stock she previously paid $25,000 for, leaving a $240,000 capital gain. That gain is what the IRS taxes.

(A real tender has other moving parts like AMT, ISO vs NSO, and withholding, but none of them change the lesson here.)

Left alone, that gain is expensive. Held longer than a year, it counts as a long-term gain, taxed below her salary, but not cheaply. Most of it falls in the 15% federal bracket, with the top slice pushed to 20%. The net investment income tax (NIIT) adds another 3.8%, a surcharge the IRS puts on investment income once you're a high earner. And California taxes the gain as ordinary income, landing around 11% at her income.

Stacked together, that's roughly 30%, about $72,000 on a $240,000 gain.

Except Priya doesn't pay it. Her loss bank, the $240,000 she spent three quiet years building, cancels the gain dollar for dollar. The taxable gain drops to $0, and the tax goes with it:

Same tender. Same company. Same $240,000 gain. The only difference is the years Priya spent quietly filling her loss bank, so one path hands $72,000 to the IRS, and the other owes nothing.

The Move

The losses matter most when a large taxable event arrives: a tender offer, a secondary sale, an acquisition, an IPO, the day you finally sell a concentrated position. You rarely control when that liquidity shows up, and once it does, you can't reach back and harvest losses from years you've already closed.

That's why the loss bank has to be built ahead of time. Markets create losses before you need them, and the tax code lets you carry those losses into the year you finally do.

So if you have startup equity and a taxable brokerage account, don't wait for the tender offer to think about losses. The goal isn't to lose money. It's to make the losses you already have work harder the day the gain arrives.

One caveat: harvested capital losses offset capital gains, not the ordinary-income portion of option taxation, which they generally can't erase.