Tax-Loss Harvesting
Realizing a loss to offset a realized gain, reducing the taxable amount for the year.
Realized losses offset realized gains within the same tax year. Where losses exceed gains, up to $3,000 can be applied against ordinary income annually, and any remainder carries forward indefinitely.
The wash-sale rule disallows the loss if a substantially identical security is bought within 30 days either side of the sale, a 61-day window in total. Buying a different fund tracking a different index is the usual way around it, though the IRS has never precisely defined substantially identical for funds, so the boundary is a matter of interpretation rather than a bright line.
It applies only in taxable accounts, since trades inside an IRA or 401(k) produce no reportable gain or loss. Worth noting that the benefit is partly deferral rather than elimination: the replacement holding carries a lower basis, so a larger gain is realized whenever it is eventually sold.
Worked through
Offsetting a gain within one year
A $12k realized gain and a $10k unrealized loss in the same taxable account, at a 15% long-term rate.
- Realized gain
- +$12,000
- Loss realized
- -$10,000
- Net taxable gain
- $2,000
- Tax at 15%
- $300 vs $1,800
$1,500 less tax this year. The replacement holding carries the lower basis forward, so part of that is deferral rather than saving.
See your own tax-loss harvesting
Promi computes this from your linked accounts, with the definition one click from the number.
Try the demo