What Is Tax-Loss Harvesting
Tax-loss harvesting is selling an investment that has declined in value to realize a capital loss, which offsets capital gains — reducing your tax bill. You can immediately reinvest in a similar (but not identical) asset and maintain your market exposure. The IRS allows losses to offset gains, so a strategic sale can save real money without disrupting your portfolio's direction.
How It Works
- You own an investment that has lost value since purchase.
- You sell it, realizing the capital loss on paper.
- You use that loss to offset capital gains from other sales that year.
- If losses exceed gains, you can deduct up to $3,000 against ordinary income per year — excess losses carry forward indefinitely.
- You reinvest proceeds into a similar (not identical) asset to stay invested.
The Wash Sale Rule
The IRS disallows a loss if you buy the same or substantially identical security within 30 days before or after the sale. This is the wash sale rule — violating it means your loss is disallowed.
Example: You sell a Vanguard S&P 500 ETF at a loss. You cannot repurchase that same ETF within 30 days. But you can immediately buy a Fidelity S&P 500 ETF — it tracks the same index but is not the same security.
A Real Example
You sold Stock A for a $4,000 gain and Stock B for a $1,500 loss this year.
- Without harvesting: you owe tax on the full $4,000 gain
- With harvesting: you owe tax on only $2,500 ($4,000 minus $1,500)
- At a 15% long-term capital gains rate, that's $225 saved from one transaction
Multiply this across a larger portfolio over many years and the cumulative savings can be substantial.
Is It Right for You?
Tax-loss harvesting makes the most sense when you have a taxable brokerage account (IRAs and 401(k)s are already sheltered), capital gains to offset, and are in the 22% tax bracket or higher.
Note: This is an advanced strategy. Consult a tax professional before implementing, especially for larger portfolios. The wash sale rule has nuances that can trip up DIY investors.