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What Is Tax-Loss Harvesting?
Tax-loss harvesting is the practice of selling investments that have declined in value to realize a loss. That loss then offsets capital gains from other investments, reducing the tax you owe. Up to $3,000 of excess losses can also offset ordinary income each year.
How Capital Gains Taxes Work
Short-term gains (assets held under one year) are taxed as ordinary income — up to 37%. Long-term gains (over one year) are taxed at 0%, 15%, or 20% depending on your income. Harvested losses reduce your net gain and therefore your tax bill.
The Wash-Sale Rule
You cannot buy back the same or a substantially identical security within 30 days before or after the sale — or the loss is disallowed. The fix: replace the sold position with a similar-but-not-identical fund to maintain market exposure while preserving the tax loss.
When to Harvest
- Review your portfolio in October or November before year-end
- Identify positions with significant unrealized losses
- Sell and immediately reinvest in a similar alternative
- Track harvested losses with your broker or tax software
Key Considerations
Tax-loss harvesting only applies to taxable brokerage accounts — not IRAs or 401ks. Done consistently over many years, it can save thousands in taxes and meaningfully boost your after-tax returns.