Tax-loss harvesting

Selling investments at a loss to offset taxable gains or some ordinary income, often reinvesting in a similar but not identical holding.

What it means

Tax-loss harvesting uses investment losses in taxable accounts to reduce taxes. Realized losses first offset capital gains, and remaining net losses can offset up to $3,000 of ordinary income each year, with any excess carried forward to future years.

The wash sale rule limits the strategy: if the same or a substantially identical investment is bought within 30 days before or after the sale, the loss is disallowed for now and added to the new holding’s cost basis. Investors often reinvest in a similar fund to stay invested. Harvesting does not erase taxes; it lowers the cost basis and often defers tax to the future.

Example

Suppose an investor realized $4,000 of gains this year and holds a fund now worth $6,000 that cost $10,000. Selling it realizes a $4,000 loss, which fully offsets the $4,000 of gains.

How it’s used

Offsetting gains after selling winning investments
Rebalancing a taxable portfolio
Using a market downturn productively

Strengths and weaknesses

Strengths

Can reduce current taxes on gains and some ordinary income
Unused losses carry forward indefinitely
Can be combined with rebalancing

Weaknesses

The wash sale rule can disallow the loss if done carelessly
Lowers cost basis, so more gain may be taxed later
Of no use in tax-advantaged accounts like IRAs
Frequent trading can add costs and complexity

Good to know

The wash sale rule can also be triggered by purchases in an IRA or a spouse’s account.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.