Tax-Loss Harvesting: A Practical Guide

The core mechanic

You sell an investment at a loss, immediately buy a similar (not identical) replacement to stay invested, and use the realized loss to offset capital gains or ordinary income.

How losses offset gains

1. Short-term losses first offset short-term gains; long-term losses offset long-term gains
2. Leftover losses cross over: net long-term losses offset short-term gains and vice versa
3. Any remaining net loss offsets up to $3,000 of ordinary income per year
4. Excess carries forward indefinitely until used up

Why the $3,000 limit matters more than you think

That $3,000 deduction is against ordinary income — taxed at up to 37%. So $3,000 in losses harvested against ordinary income saves up to $1,110 federal tax. Plus future gains you offset.

When it's worth doing

• Volatile asset has dropped significantly
• You can find a non-identical replacement (avoiding wash sale)
• You're in the 15%+ LTCG bracket OR have ordinary income to offset
• The trading cost is near zero (it usually is now)

When to skip it

• You're in the 0% LTCG bracket — harvesting wastes the offset
• The position is in a tax-advantaged account (IRA, 401k) — losses there don't generate deductions
• You'd be forced into a worse investment

The wash-sale trap

See the wash-sale deep dive. The key: don't repurchase 'substantially identical' securities within 30 days, and don't trigger it accidentally through dividend reinvestment or an IRA purchase.

Tax-loss harvesting isn't free money

You're deferring tax, not eliminating it. Your replacement shares have a lower basis, so you'll have a bigger gain later. The win comes from: (a) ordinary income offset, (b) lower future rate vs current, or (c) holding until step-up at death.