Tax-loss harvesting is the practice of selling an investment that has fallen below its purchase price so you can use the loss to lower your tax bill. The three moves that follow use harvested losses to offset capital gains, reduce ordinary income, and reset your cost basis, all while you stay invested.
In the short above, Austin explains why a paper loss only helps your taxes once you act on it, and why the goal is to capture losses without leaving the market.
How does tax-loss harvesting work?
Tax-loss harvesting works only in a taxable brokerage account, where you report gains and losses each year. When you sell a holding for less than you paid, you realize a capital loss. That loss is a tax asset you can put to work against income the tax code would otherwise reach.
The catch is staying invested. If you sell a fund and sit in cash, you risk missing a rebound while chasing a tax benefit. The skill is harvesting the loss and immediately reinvesting in something similar, so your money stays in the market and your mix barely changes.
One rule governs all of this. The wash-sale rule disallows the loss if you buy the same or a substantially identical investment within 30 days before or after the sale. Working within that window is what separates a clean harvest from a wasted one.
Three tax-loss harvesting moves that lower your tax bill
The value of a harvested loss depends on how you apply it. These three moves cover the main ways a loss can cut what you owe.
- Offset your capital gains. A realized loss cancels out a realized gain dollar for dollar. If you sold a winner earlier in the year, harvesting a loser can erase part or all of that gain, so you keep more of the profit instead of sending it to the IRS.
- Deduct against ordinary income. When your losses are larger than your gains, current rules let you apply a limited amount of the excess against ordinary income each year. Ordinary income is usually taxed at a higher rate than long-term gains, so a dollar used here can be worth more.
- Carry losses forward. Any loss you cannot use this year does not expire. It carries forward, ready to offset gains or income down the road. A loss harvested in a down market can quietly shelter a sale you make years later.
Used together, these moves turn a market dip into a lasting tax benefit rather than a one-time event.
What is the wash-sale rule, and how do you stay within it?
The wash-sale rule is the most important guardrail in tax-loss harvesting. If you sell at a loss and buy back the same or a substantially identical security inside the 30-day window on either side of the sale, the IRS disallows the loss.
You have two clean ways to harvest without tripping it. You can wait more than 30 days before buying the original holding back, accepting that you are out of that position for a month. Or you can immediately buy a similar but not identical investment, such as a different fund tracking a comparable part of the market, so your money stays invested the entire time.
| Approach | What you do | Trade-off |
|---|---|---|
| Wait it out | Sell, hold cash or a placeholder, rebuy after 30 days | Time out of the original position |
| Swap to similar | Sell, immediately buy a comparable fund | Slightly different holding, fully invested |
The second approach is what makes harvesting practical. Done carefully, your portfolio's risk and exposure stay almost the same while you bank the loss. This coordination sits at the heart of disciplined investment planning, where the tax move and the market move are decided together.
Who is tax-loss harvesting a good fit for?
Harvesting helps most when you have taxable investments and a reason to use the losses. It tends to fit these situations:
- You hold investments in a taxable brokerage account, not only in IRAs or 401(k) plans.
- You have realized gains this year, or expect to sell appreciated holdings soon.
- Your account holds positions trading below what you paid, often after a market pullback.
- You want to reset cost basis and capture losses without changing your long-term strategy.
It does little for someone whose money sits entirely in retirement accounts, since those do not report yearly gains or losses. It also matters less in a year with no gains and low income, though carrying losses forward can still be worthwhile.
Why coordinating the tax and investment decision matters
Tax-loss harvesting looks simple from the outside, yet a careless harvest can cost more than it saves. Selling the wrong lot, missing the wash-sale window, or harvesting a loss you cannot use can leave you with a smaller portfolio and no tax benefit to show for it.
This is where having a CPA on staff changes the conversation. Because our firm is a fiduciary that coordinates the investment decision and the tax decision together, a harvest meant to lower your tax bill does not quietly disrupt your allocation or create a problem on your return. You can see how we bring those two sides together on our financial planning page.
Harvesting also rarely stands alone. It works alongside how you take income and when you realize gains, both of which shape the tax you pay over a lifetime.
If you hold taxable investments and want to know whether harvesting could lower what you owe, the next step is a conversation about your accounts. Talk with our team and we will review where your positions stand today and whether capturing losses fits your plan.
This article is educational and is not personalized investment, tax, or legal advice. Wealth Ease Wealth Management is a registered investment adviser; consult a qualified professional about your specific situation.
Frequently asked questions
What is tax-loss harvesting?
Tax-loss harvesting means selling an investment that has dropped below what you paid for it, locking in the loss on purpose. That realized loss can offset capital gains and a limited amount of ordinary income, lowering your tax bill while you stay invested through a replacement holding.
How much can tax-loss harvesting save on taxes each year?
Harvested losses first offset your capital gains dollar for dollar. If losses exceed gains, current rules let you deduct a limited amount against ordinary income each year, and you carry the rest forward to future years. The savings depend on your gains, your income, and your tax bracket.
What is the wash-sale rule?
The wash-sale rule disallows a loss if you buy the same or a substantially identical investment within 30 days before or after the sale. To keep the loss, you wait out the window or buy a similar but not identical holding, so you stay invested without breaking the rule.
Does tax-loss harvesting make sense in a retirement account?
No. Tax-loss harvesting only works in taxable brokerage accounts, where gains and losses are reported each year. Inside an IRA or 401(k), you do not report yearly gains or losses, so selling at a loss there gives you nothing to deduct on your return.