Quick Answer
Tax-loss harvesting means selling investments at a loss to offset capital gains, reducing your tax bill. If you have $10,000 in gains and harvest $10,000 in losses, your capital gains tax is $0. Excess losses offset up to $3,000 of ordinary income per year. The wash sale rule prohibits rebuying the same security within 30 days.
Key Takeaways
- Tax-loss harvesting offsets capital gains with realized losses — reducing or eliminating capital gains tax.
- Up to $3,000 in net losses can offset ordinary income per year; excess carries forward indefinitely.
- The wash sale rule prevents buying the same or "substantially identical" security within 30 days.
- Robo-advisors automate tax-loss harvesting and can add 0.5–1.5% annual return in taxable accounts.
Tahir Özcan
Verified AuthorFounder & Lead Financial Content Author at WealthCalc
Tahir has a background in finance, economics, and software engineering. He reviews every calculator formula against official sources (IRS, SSA, BLS) and ensures all educational content meets WealthCalc's editorial standards. Learn more about our team →
Tax-loss harvesting is one of the most effective tax strategies for investors — yet most people never use it. The concept is straightforward: sell investments that have declined in value to generate a loss that offsets your gains, then reinvest in a similar (but not identical) asset to maintain your portfolio allocation.
How Tax-Loss Harvesting Works
Step-by-step example:
- Step 1: You sold Stock A for a $15,000 long-term gain
- Step 2: You hold Fund B which is down $12,000 from your purchase price
- Step 3: Sell Fund B, realizing the $12,000 loss
- Step 4: Your net taxable gain is now $15,000 − $12,000 = $3,000
- Step 5: Immediately buy a similar (not identical) fund to maintain market exposure
- Tax saved (15% LTCG rate): $12,000 × 15% = $1,800
The Wash Sale Rule
The IRS wash sale rule disallows the loss deduction if you buy "substantially identical" securities within 30 days before or after the sale:
- Prohibited: Selling Vanguard S&P 500 ETF (VOO) at a loss, then buying it back within 30 days
- Prohibited: Selling VOO and buying Vanguard S&P 500 Index Fund (VFIAX) — substantially identical
- Allowed: Selling VOO and buying iShares Core S&P 500 (IVV) — similar but not identical (different fund company)
- Allowed: Selling a total market fund and buying a large-cap growth fund — different index/strategy
- Crypto exception: The wash sale rule does NOT apply to cryptocurrency in 2026 — you can sell and rebuy immediately
When to Harvest Losses
Optimal timing for tax-loss harvesting:
- Market dips: After corrections or sector drops, scan your portfolio for harvestable losses
- Year-end (October–December): Review annual gains and offset them before year-end
- Continuous monitoring: Robo-advisors scan daily — they harvest losses whenever available, not just in December
- Do NOT wait for "recovery": Once you swap into a similar fund, you capture the same recovery with the tax benefit
How Much Can Tax-Loss Harvesting Save?
Estimated annual value by portfolio size:
- $100,000 portfolio: $200–$600/year in tax savings
- $500,000 portfolio: $1,000–$3,000/year
- $1,000,000 portfolio: $2,000–$7,000/year
- Robo-advisors like Wealthfront and Betterment: Report 0.5–1.5% annual tax alpha from automated harvesting
- Over 20 years: These savings compound — $2,000/year at 7% growth = $82,000 additional wealth
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Frequently Asked Questions
Should I tax-loss harvest in my IRA or 401(k)?
No — tax-loss harvesting only works in taxable brokerage accounts. Retirement accounts (IRA, 401(k), Roth) are already tax-advantaged, and you cannot claim capital losses on transactions within them. Focus harvesting efforts exclusively on your taxable investment accounts.
Does tax-loss harvesting just defer taxes?
Partially yes — your new cost basis is lower, meaning a larger gain when you eventually sell. However, deferral has real value: a dollar of tax saved today and invested for 20 years at 7% is worth $3.87. Additionally, if you hold the replacement asset until death, the step-up in basis eliminates the deferred gain entirely.
Can I do tax-loss harvesting myself or do I need a service?
You can absolutely DIY — just sell losing positions and buy similar (not identical) replacements while respecting the 30-day wash sale rule. However, robo-advisors automate the process, monitor daily, and handle the compliance. For portfolios over $50,000 in taxable accounts, the tax savings from automated harvesting usually exceed the robo-advisor fee.
Our Methodology
Data in this article is sourced from official government agencies (IRS, SSA, BLS, Federal Reserve), peer-reviewed financial research, and industry-standard formulas. All figures are updated for 2026. Our editorial team reviews each article quarterly for accuracy. Last verified: March 2026.
Editorial Disclaimer
This article is for educational purposes only and does not constitute financial advice. Information is based on publicly available data from government sources (IRS, SSA, BLS) and industry-standard financial principles. Always consult a qualified financial professional before making decisions based on this content. Read our full Financial Disclaimer.