Tax-Loss Harvesting: Turn Losses Into Tax Savings

When investments lose value, there's a silver lining: you can use those losses to reduce your taxes. It's called tax-loss harvesting.

How It Works

1. Sell an investment that's lost value
2. Use the loss to offset capital gains
3. If losses exceed gains, deduct up to $3,000 from ordinary income
4. Carry forward remaining losses to future years

You turn paper losses into real tax savings.

The Math

Without tax-loss harvesting:

• Capital gains this year: $10,000
• Tax owed (15% rate): $1,500

With tax-loss harvesting:

• Capital gains: $10,000
• Harvested losses: $8,000
• Net taxable gains: $2,000
• Tax owed: $300

Tax savings: $1,200

The Wash Sale Rule

The Rule: If you buy a "substantially identical" investment within 30 days before OR after selling at a loss, the loss is disallowed.

What's "substantially identical"?

• Same stock = identical
• Same mutual fund = identical
• Similar ETF from different provider = usually OK
• S&P 500 ETF → Total Market ETF = usually OK

Harvesting Strategies

Strategy 1: Swap and Hold

1. Sell losing investment
2. Immediately buy similar (but not identical) investment
3. Stay invested, but harvest the loss

Example:

• Sell Vanguard S&P 500 ETF (VOO) at a loss
• Buy iShares S&P 500 ETF (IVV)
• Same exposure, different fund, loss harvested

Strategy 2: Wait 31 Days

1. Sell losing investment
2. Wait 31 days
3. Buy the same investment back

Risky if the market moves against you during the wait.

When to Harvest

What NOT to Do

Automated Tax-Loss Harvesting

Some robo-advisors do this automatically:

• Wealthfront
• Betterment
• M1 Finance

They scan daily for opportunities and handle the wash sale rules.

The Long-Term Impact