Tax-Loss Harvesting: Turning Losses Into Tax Savings
Selling losing investments strategically can reduce your tax bill — here's the responsible way to do it.
What it is
Selling investments at a loss and using those losses to offset capital gains and (up to a limit) ordinary income. You then reinvest the proceeds in a similar — but not 'substantially identical' — investment to maintain market exposure.
Why it works
Losses offset gains dollar for dollar. After offsetting all capital gains, up to $3,000 of net losses per year can offset ordinary income, with excess carried forward indefinitely.
The wash-sale rule
If you buy the same or 'substantially identical' security within 30 days before or after the sale, the loss is disallowed. The rule applies across accounts including your IRA. Replace the sold fund with a different (similar but not identical) one to stay clean.
When it helps most
High-income investors with taxable brokerage accounts and gains to offset benefit most. Tax-sheltered accounts (401k, IRA) don't generate taxable gains so harvesting doesn't apply.
Automated harvesting
Many robo-advisors offer automatic tax-loss harvesting throughout the year. Useful if you don't want to manage it manually. Make sure the replacement asset choices make sense for you.
Frequently asked questions
Can I harvest losses every year?
Yes — in any year you have losses, harvest opportunistically. Track carryforwards across years.
Does it reset cost basis?
Yes — your basis in the new investment is what you paid for it, which can increase future taxable gains. The savings now usually exceed the future cost.
Should I sell winners to harvest gains?
'Gain harvesting' has narrow use cases — usually if you're in the 0% capital gains bracket and want to reset basis tax-free.