Tax-Loss Harvesting

How It Works

Tax-loss harvesting is a strategy where you deliberately sell investments that have declined in value to realize capital losses, which can offset capital gains from other investments. If your losses exceed your gains, you can deduct up to $3,000 of net capital losses against ordinary income per year, with excess losses carrying forward indefinitely. The potential savings are significant: harvesting a $10,000 loss against long-term gains saves $1,500 at the 15% rate, or up to $2,380 at the 20% rate plus NIIT. The key constraint is the wash sale rule, which disallows the loss if you purchase the same or a "substantially identical" security within 30 days before or after the sale. To maintain your portfolio allocation, you can purchase a similar but not identical investment — for example, selling one S&P 500 index fund and buying a total stock market fund. After 31 days, you can switch back if desired. Tax-loss harvesting is most valuable in taxable brokerage accounts. Losses in retirement accounts (IRAs, 401(k)s) have no tax benefit. Many robo-advisors and financial platforms now offer automated tax-loss harvesting, monitoring portfolios daily for harvesting opportunities. The strategy works best in volatile markets where individual holdings may be down even when the overall portfolio is up. Frequent harvesters should track their cost basis carefully and be aware that harvesting reduces your cost basis in the replacement security, potentially increasing future gains. The benefit is a tax deferral — you'll eventually pay tax when you sell the replacement at a gain — but the time value of money makes this deferral valuable.