Tax-Loss Harvesting Basics
How selling investments at a loss can lower your tax bill, and the wash-sale rule that trips people up.
- By
- Lynktor Editorial Team
- Reviewed by
- Lynktor Research Desk
- Updated
The idea
When an investment in a taxable account is worth less than you paid, you can sell it and realize the loss. Realized losses offset realized capital gains, which lowers the tax you owe.
How much it can save
In the U.S., losses first offset gains of the same type, then other gains. If losses exceed gains, up to $3,000 a year can offset ordinary income. Anything left carries forward to future years.
A loss you cannot avoid can still be put to work.
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. Many investors instead buy a similar but not identical fund to keep their market exposure.
Things to keep in mind
- It only applies in taxable accounts, not in IRAs or 401(k)s.
- Selling lowers your cost basis on the replacement, so more gain may be taxed later. The benefit is deferral, plus lower rates if gains become long-term.
- Trading costs and complexity can outweigh small savings.
Tax rules are detailed and change over time. For large amounts, check with a tax professional.