Tax-Loss Harvesting Explained: Turn Investment Losses Into Tax Savings
Selling losing investments can reduce your tax bill. Learn how tax-loss harvesting works and how to avoid the wash-sale rule.
Tax-loss harvesting means selling an investment in a taxable account at a loss to offset capital gains — and potentially some ordinary income — on your tax return. You can then reinvest the proceeds to stay in the market.
How It Works
- Capital losses first offset capital gains.
- If losses exceed gains, up to $3,000 per year can generally offset ordinary income ($1,500 if married filing separately).
- Unused losses can be carried forward to future years.
Details are explained in the IRS capital gains and losses topic.
The Wash-Sale Rule
If you buy the same or a "substantially identical" security within 30 days before or after the sale, the loss is disallowed for now and added to the cost basis of the new shares. Many investors stay invested by buying a similar but not identical fund — for example, switching between two index funds that track different indexes.
When It Makes Sense
Tax-loss harvesting is most valuable in taxable accounts during market declines — see our guide to corrections. It doesn't apply to IRAs or 401(k)s, where gains and losses aren't taxed annually. Remember that harvesting lowers your cost basis, so it often defers taxes rather than eliminating them.
Frequently Asked Questions
Is tax-loss harvesting worth it?
Can I harvest losses in my IRA?
Should I consult a tax professional?
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