How Tax-Loss Harvesting Works
Tax-loss harvesting is the strategy of intentionally selling investments at a loss to offset realized capital gains, reducing your current tax bill. Capital losses offset capital gains dollar-for-dollar. If net losses exceed gains, up to $3,000 can offset ordinary income annually, and any remaining losses carry forward indefinitely.
Long-term gains (held over 1 year) are taxed at 0%, 15%, or 20%. Short-term gains are taxed as ordinary income up to 37%. The key restriction is the wash sale rule: you cannot buy the same or substantially identical security within 30 days before or after the loss sale. Swap into a similar but not identical ETF to maintain market exposure.
Frequently Asked Questions
The IRS disallows a loss if you repurchase the same security within 30 days. Wait at least 31 days, or buy a similar fund to keep market exposure without triggering the rule.
Yes. Losses exceeding the $3,000 ordinary income offset carry forward indefinitely to future tax years.