When an investment falls below what you paid, you have a paper loss, and the tax code lets you put it to work. Tax-loss harvesting means selling a losing investment to realize the loss, using it to offset taxable gains and some ordinary income, and reinvesting so your overall strategy barely changes. Done right, it turns a market dip into a genuine tax saving.
Here is how it works, the rule you must not break, and who it helps.
How it works
Realized losses first offset your realized capital gains, dollar for dollar, lowering the tax on those gains. If your losses exceed your gains, you can use up to $3,000 of the excess to offset ordinary income each year, and carry any remainder forward to future years indefinitely. So a loss you harvest now can keep saving you tax for years.
Enter a loss and your gains and rates above to see the tax it can save.
The wash-sale rule
There is one crucial catch: the wash-sale rule. If you buy the same or a 'substantially identical' investment within 30 days before or after selling at a loss, the IRS disallows the loss. The workaround is to reinvest the proceeds in a similar but not identical holding, a different fund tracking the same market, for example, so you stay invested without tripping the rule.
The point is to capture the loss without leaving the market. Reinvest in a similar, not identical, holding so you keep your exposure and your tax deduction.
Who benefits, and the caveats
Tax-loss harvesting helps most in taxable brokerage accounts, it does nothing inside a 401(k) or IRA, where gains and losses are not taxed as you trade. It is most valuable for investors with realized gains to offset or high ordinary-income rates. Remember it defers rather than erases tax, since selling low resets your cost basis lower, but capturing losses now, especially to offset high-rate income, is usually a real, lasting benefit.
Estimate the saving above, and mind the wash-sale window whenever you harvest.
Frequently asked questions
What is tax-loss harvesting?
Selling an investment at a loss to offset taxable gains and up to $3,000 of ordinary income, while reinvesting so your strategy stays intact. It turns a market decline into a tax saving.
What is the wash-sale rule?
If you buy the same or a substantially identical investment within 30 days before or after selling at a loss, the loss is disallowed. Reinvesting in a similar but not identical holding avoids it.
How much can tax-loss harvesting save?
Losses offset capital gains dollar for dollar, and up to $3,000 of excess loss can offset ordinary income each year, with the rest carried forward. The saving depends on your gains and tax rates.
Does tax-loss harvesting work in a 401(k) or IRA?
No. Gains and losses inside retirement accounts are not taxed as you trade, so harvesting only helps in taxable brokerage accounts.
Put your own numbers in.
Every idea in this guide has a calculator behind it. Start with yours.
Open the calculator