Tax Strategy
Tax-Loss Harvesting: Use Losses to Lower Your Bill
A practical guide to harvesting investment losses — including the wash-sale rule that trips up most DIY-ers
Quick answer
Tax-loss harvesting means selling investments at a loss to offset taxable gains, plus up to $3,000 of ordinary income a year. Extra losses carry forward to future years. The wash-sale rule is the main pitfall: if you rebuy a substantially identical security within 30 days, the IRS disallows the loss.
Tax-loss harvesting (TLH) is the practice of intentionally selling investments at a loss to offset taxable gains — and up to $3,000 of ordinary income per year. Done right, it's worth thousands annually in tax savings. Done wrong, the wash-sale rule wipes out the benefit entirely.
How it works
Simple in concept:
- ·You have an investment with a paper loss (e.g., bought at $100, now worth $70)
- ·You sell it, realizing a $30 capital loss
- ·That $30 loss offsets up to $30 of capital gains you have elsewhere — meaning that much income avoids tax
- ·If your losses exceed your gains, up to $3,000 can offset ordinary income (wages, interest)
- ·Anything beyond $3,000 carries forward to future years
The wash-sale rule (where most people mess up)
If you sell at a loss AND buy a 'substantially identical' security within 30 days before or after, the IRS DISALLOWS the loss. The loss gets added to the basis of the replacement security, deferring (not eliminating) the tax benefit.
- ·Watch the 61-day window: 30 days before + sale day + 30 days after
- ·'Substantially identical' is fuzzy — same exact stock yes; mutual fund vs ETF tracking the same index is ambiguous
- ·Conservative interpretation: avoid the same fund family's same-index product
- ·Liberal interpretation: VOO and IVV (different issuers, same S&P 500 index) may not be identical — but the IRS hasn't ruled definitively
How to actually execute
- ·Step 1: Identify losing positions in taxable accounts (not IRAs — losses don't count there)
- ·Step 2: Sell the position to realize the loss
- ·Step 3: Replace with a SIMILAR (but not substantially identical) security to maintain market exposure
- ·Step 4: Wait 31+ days, then optionally swap back to your original holding
- ·Step 5: Track everything for your CPA — Schedule D paperwork is detailed
Common harvesting opportunities
- ·Index ETFs after a market downturn — sell one and buy a similar but distinguishable one
- ·Individual stocks that have declined significantly
- ·Sector funds during sector-specific drawdowns
- ·Cryptocurrencies (no wash-sale rule applies as of 2025 — though Congress has discussed extending it)
Limits and rules to know
- ·$3,000 annual offset against ordinary income (married filing jointly or single)
- ·$1,500 if married filing separately
- ·Long-term vs short-term losses are netted separately first
- ·Carry-forward losses last indefinitely
- ·Doesn't help in retirement accounts (IRAs, 401(k)s) — losses there can't be claimed
Common mistakes
- ·Triggering wash sales by automatic 401(k) contributions or dividend reinvestments that re-buy the same security
- ·Selling at a loss in a taxable account while spouse buys the same security (wash-sale rules apply across spouses)
- ·Harvesting losses in tax-deferred accounts (no benefit)
- ·Skipping documentation — Form 8949 + Schedule D require detailed records
- ·Harvesting just to harvest — if your tax rate is 0% on long-term gains anyway, there's nothing to offset
Frequently asked questions
What is tax-loss harvesting?
It's selling an investment at a loss on purpose to offset taxable capital gains elsewhere, plus up to $3,000 of ordinary income each year. Losses beyond that carry forward to future years. Done right, it can save thousands annually.
What is the wash-sale rule?
If you sell at a loss and buy a substantially identical security within 30 days before or after, the IRS disallows the loss. Watch the full 61-day window, and avoid rebuying the same fund family's same-index product.
How do I execute tax-loss harvesting?
Identify losing positions in taxable accounts, sell to realize the loss, replace with a similar but not substantially identical security to keep market exposure, wait 31 or more days, and track everything for your CPA's Schedule D.
Does tax-loss harvesting work in my IRA or 401(k)?
No. Losses in tax-deferred accounts like IRAs and 401(k)s can't be claimed. Tax-loss harvesting only applies to taxable brokerage accounts.
What are the limits on tax-loss harvesting?
You can offset up to $3,000 of ordinary income per year ($1,500 if married filing separately) after netting gains and losses. Long-term and short-term losses are netted separately first, and unused losses carry forward indefinitely.
The Takeaway
Tax-loss harvesting is worth $1K-$10K+ per year for households with taxable investment accounts and meaningful balances. The wash-sale rule is the most common pitfall — track it carefully. Many automated brokerages (Wealthfront, Betterment) do TLH algorithmically. For DIY-ers, do it manually in December when you can see the full year's gains and losses.
Free tax-loss harvesting review
We'll review your taxable holdings, identify harvesting opportunities, and coordinate the execution with your CPA — without triggering wash-sale issues.
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ReadEducational content only. Not financial, tax, or legal advice. Always consult a licensed professional before acting on the information in this post.