Tax-Loss Harvesting
Selling investments at a loss to offset capital gains or up to $3,000 of ordinary income each year.
What You Need to Know
Tax-loss harvesting is a core tax strategy for taxable investment accounts. You intentionally realize losses to reduce the taxes owed on current or future gains.
How It Works:
- Sell an investment trading below your purchase price
- Realize the capital loss on your tax return
- Immediately reinvest in a similar (not identical) asset to maintain market exposure
- Use losses to offset gains or $3,000 of ordinary income annually (excess carries forward indefinitely)
Watch the Wash-Sale Rule: You can't buy the same (or "substantially identical") investment 30 days before or after harvesting the loss, or the tax benefit is disallowed.
Example: Sell an S&P 500 ETF for a $5,000 loss, buy a Total Market ETF as a replacement, and use the loss to offset $5,000 of realized gains from rebalancing another position.
Sources & References
This information is sourced from authoritative government and academic institutions:
- irs.gov
https://www.irs.gov/taxtopics/tc409
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.