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Tax-Loss Harvesting for Beginners
Sell a fund that is down $8,000, buy a similar-not-identical replacement, and the tax code hands you an $8,000 deduction for a portfolio that barely moved. Tax-loss harvesting turns ordinary market dips into a tax asset that offsets gains today and up to $3,000 of income every year after.
The Mechanism in Four Moves
- Identify positions trading below your cost basis.
- Sell them inside a taxable account — retirement accounts do not qualify.
- Immediately buy a similar but not substantially identical fund to stay invested, for example moving one total-market index fund to a different provider's equivalent.
- Use the realized losses to cancel realized gains, then up to $3,000 against ordinary income, carrying the rest forward indefinitely.
An $8,000 loss against a $20,000 gain cuts the taxable gain to $12,000. At a 15% rate that is $1,200 kept this year, plus a $3,000 income deduction in each following year if the carryforward lasts.
The Wash-Sale Rule, Plainly
Buy the same or substantially identical security within 30 days before or after the sale — in any account, including an IRA — and the loss is disallowed. The fix is discipline: different fund provider, different index construction, and no automatic-dividend or rebalancing purchases in the 61-day window. Spouses count as one taxpayer for this rule. An IRA purchase accidentally triggering wash sale does not preserve the loss either; it simply disappears.
When Harvesting Actually Pays
The strategy earns most in volatile years and early accumulation decades, when balances swing widely and tax rates on future gains are known. It matters least inside Roth accounts, where gains are already tax-free, and inside 401(k)s, where harvesting is not possible at all. Expect modest but repeatable value: studies of systematic monthly harvesting in index portfolios commonly estimate 0.2% to 0.6% of after-tax return per year — real money on a $500,000 portfolio, not a life-changing amount, and never a reason to abandon a sound allocation.
This article is general educational information only, not financial, tax, investment, accounting, or legal advice, and is not a recommendation to buy, sell, or hold any product or security. Figures reflect published IRS, HMRC, and Social Security Administration guidance for 2026 and are subject to change and annual indexing; always confirm current thresholds with the official source before acting. Rules differ by country, state, and personal situation, and nothing here creates a fiduciary or advisory relationship. This site is supported by advertising, which does not influence our editorial conclusions. For any decision with real financial consequences, consult a licensed fiduciary advisor or tax professional.