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Losing money is never fun. But it can lower your tax bill.
When you sell an investment for less than you paid, you realize a capital loss. That loss can offset capital gains dollar for dollar. If your losses exceed your gains, you can deduct up to $3,000 against ordinary income per year. Any remaining losses carry forward indefinitely to future years.
The key insight: you don't have to abandon your investment thesis. You sell the losing position, immediately buy a similar (but not identical) investment, and stay invested — while banking a tax deduction.
You're sitting on a $5,000 unrealized loss. The market dropped, but you still believe in the long-term thesis.
You now have a $5,000 capital loss locked in. This can be used to offset $5,000 of capital gains from other investments.
You reinvest in a different tech ETF or a total market ETF — maintaining your market exposure while the 30-day wash-sale window passes.
$5,000 loss offsets $5,000 of capital gains. If you have no gains, you can deduct $3,000 against ordinary income this year — and carry the remaining $2,000 forward.
If you sell a security at a loss and buy the same or substantially identical security within 30 days before or after the sale, the IRS disallows the loss. The 30-day window goes both directions — you can't buy first, sell at a loss, and buy again.
* Note: "Substantially identical" isn't perfectly defined by the IRS. When in doubt, choose a fund with a clearly different index or broader scope.
The IRS has a specific netting order for capital gains and losses:
Short-term losses offset short-term gains first
ST losses vs ST gains
Long-term losses offset long-term gains first
LT losses vs LT gains
Net short-term loss offsets net long-term gain (or vice versa)
Cross-netting after same-type is exhausted
Remaining net loss offsets up to $3,000 of ordinary income
Reduces W-2 / 1099 income directly
Any remaining loss carries forward to next year
Indefinitely — no expiration
Assuming $10,000 harvested loss applied to gains
Best use: offset short-term gains first — highest tax rate saved.
If you've already sold winners or plan to, harvesting losses directly offsets those gains — potentially at a 15-20% savings rate.
Tax-loss harvesting only applies to taxable accounts. Gains and losses inside IRAs and 401(k)s have no tax impact since they're already tax-advantaged.
Market corrections are prime harvesting opportunities. A 20% drop creates significant losses to harvest — while you stay invested via a replacement fund.
If you're already paying 0% on long-term gains, harvesting losses has limited value. You may actually want to harvest gains at 0% instead.
Platforms like Betterment, Wealthfront, and Fidelity's managed accounts scan your portfolio daily for harvesting opportunities. For significant taxable portfolios (typically $100K+), automated harvesting can generate meaningful annual savings. If you manage your own portfolio, a year-end review in November–December is a good time to scan for positions with unrealized losses before the tax year closes.
The practice of selling an investment at a loss to generate a capital loss that offsets capital gains — or up to $3,000 of ordinary income per year — reducing your current tax bill.
An IRS rule that disallows a capital loss if you buy the same or a 'substantially identical' security within 30 days before or after the sale. The loss isn't gone forever — it's added to the cost basis of the new shares.
If your capital losses exceed gains plus the $3,000 ordinary income limit, the unused losses carry forward indefinitely to future tax years — reducing taxes when you eventually realize gains.
Two securities are substantially identical if they represent the same economic exposure. Selling SPY and buying VOO (both S&P 500 ETFs) may trigger the wash-sale rule. Selling SPY and buying a total market ETF typically does not.
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