Tax-Loss Harvesting
The plain answer
Section titled “The plain answer”Tax-loss harvesting means selling an investment for less than you paid and using the realized loss to offset realized capital gains. If your losses exceed your gains, some of the remaining loss may reduce other taxable income, and unused losses may carry forward.
The tax benefit is useful, but it should support your investment plan rather than control it. Do not spend a dollar to save thirty cents.
How it actually works
Section titled “How it actually works”A loss affects your taxes only after you sell the investment. The loss first offsets capital gains according to the tax rules. If losses remain after gains are offset, the rules may allow a limited deduction against other income and carry the rest into future years.
Harvesting a loss does not erase investment risk or make a poor investment good. It changes when gains and losses appear on your tax return. Selling can also create trading costs, time out of the market, or a portfolio that no longer matches your plan.
The wash-sale rule matters when you buy a substantially identical security within the restricted period around the loss sale. If the rule applies, the current deduction can be disallowed and the loss generally adjusts the basis of replacement shares instead.
What this means for you
Section titled “What this means for you”Start with your target portfolio. Consider harvesting when a meaningful loss is available and you can stay invested without buying a substantially identical replacement. A broad fund with a different underlying index may provide similar market exposure, but whether two investments are substantially identical depends on their facts.
Compare the expected tax benefit with trading costs, bid-ask spreads, market exposure, and the effort required to track the transaction. A small deduction is rarely worth distorting a sound portfolio.
Review activity across every account you and your spouse control, including retirement accounts and automatic dividend reinvestment. A purchase outside the account where you sold can still create a wash-sale problem.
Common mistakes
Section titled “Common mistakes”- Selling only for a tax deduction, even when the replacement makes the portfolio worse
- Buying the same investment back too soon
- Forgetting automatic purchases or dividend reinvestment
- Looking at one brokerage account while ignoring purchases in another account
- Treating a paper loss as deductible before selling
- Assuming tax-loss harvesting creates free money rather than changing the timing of taxes
Related pages
Section titled “Related pages”Educational content, not personalized financial, tax, or legal advice. No affiliate relationships. Figures are for tax year 2026 and change annually.Read the full disclaimer.