Tax-Loss Harvesting: A Practical Guide

⚡In 30 seconds

  • •Learn how to use investment losses to offset gains and reduce taxes.
  • •Uses 2 calculator(s) for hands-on examples

Tax-loss harvesting is a strategy that uses investment losses to offset gains, reducing your overall tax bill. It's most valuable for high-income investors in taxable accounts.

How Tax-Loss Harvesting Works

Sell investments that have declined in value to realize a loss.

Use those losses to offset capital gains from other investments.

Unused losses can typically be carried forward to future years or offset ordinary income (up to limits).

The Wash Sale Rule

You cannot buy a "substantially identical" security within 30 days before or after the sale.

If you violate this rule, the loss is disallowed for tax purposes.

Consider buying a similar (but not identical) investment to maintain market exposure.

Best Practices

Review your portfolio quarterly for harvesting opportunities.

Document all transactions carefully.

Consider the long-term investment thesis—don't sell good investments just for tax benefits.

Example: Offsetting a $10,000 Gain

You have $10,000 in gains from Stock A and $8,000 in losses from Stock B.

  • 1.Realized gain from Stock A: $10,000
  • 2.Realized loss from Stock B: $8,000
  • 3.Net taxable gain: $10,000 - $8,000 = $2,000
  • 4.Tax saved (at 15% rate): ~$1,200
Calculate your scenario →

FAQ

Does tax-loss harvesting work in retirement accounts?

No, retirement accounts like IRAs and 401(k)s are tax-advantaged, so realized gains aren't taxed until withdrawal.

Is there a limit to how much I can harvest?

There's no limit on capital losses to offset capital gains. However, only $3,000 (US) of net capital losses can offset ordinary income per year.

Key Terms

Tax-Loss HarvestingSelling losing investments to offset gains and red...Wash Sale RuleIRS rule preventing loss deductions if you rebuy t...Capital GainsProfit from selling an investment for more than yo...

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