Tax-Loss Harvesting
In short
Selling losing positions to offset capital gains — reducing your tax bill
If you're up $10,000 on Apple but down $3,000 on another stock, you can sell the loser to offset $3,000 of your Apple gains. You only pay tax on $7,000 instead of $10,000. The IRS lets you use losses to cancel gains.
Tax-loss harvesting sells losing positions to realize capital losses that offset capital gains. Losses first offset gains of the same type (short-term vs long-term), then can offset the other type. Up to $3,000 of excess losses can offset ordinary income annually.
Formula
Tax Savings = Harvested Loss × Marginal Tax RateRelated concepts
- Wash Sale Rule — If you sell a stock at a loss and buy it back within 30 days (before or after), the IRS disallows the loss. This prevents you from harvesting losses while staying invested. To avoid it, buy a similar but different stock.
- Capital Gains Tax — When you sell an investment for more than you paid, the profit is a capital gain and the government taxes it. Hold less than a year = higher rate (up to 37%). Hold more than a year = lower rate (0%, 15%, or 20%).
- Carryforward Losses — If you lose $15,000 on investments but only have $5,000 in gains and can use $3,000 against income, you have $7,000 left over. You can 'carry forward' that $7,000 to use in future years when you have gains.
- Replacement Securities — After selling a stock at a loss for tax purposes, you can't buy it back for 31 days (wash sale rule). Instead, buy something similar — like selling SPY and buying IVV (both track the S&P 500) — so you stay invested while harvesting the loss.