What is the main benefit of tax-loss harvesting?

The main benefit of tax-loss harvesting is its ability to reduce your current year's taxable income and offset future capital gains. By strategically selling investments at a loss, you can lower your tax bill, potentially deducting up to $3,000 against ordinary income annually and carrying forward excess losses indefinitely.

How much can I deduct from my income using tax-loss harvesting?

After offsetting all capital gains, you can deduct up to $3,000 of net capital losses against your ordinary income each year. Any remaining losses can be carried forward indefinitely to offset capital gains and up to $3,000 of ordinary income in future tax years.

What is the wash-sale rule and why is it important?

The wash-sale rule prohibits you from claiming a capital loss if you sell a security and then buy a "substantially identical" security within 30 days before or after the sale. This 61-day window is critical because violating it disallows the loss, making your tax-loss harvesting efforts ineffective.

Can I tax-loss harvest in my IRA or 401(k)?

No, tax-loss harvesting is only applicable to investments held in taxable brokerage accounts. Losses within tax-advantaged accounts like IRAs, 401(k)s, or HSAs cannot be used to reduce your current tax liability because these accounts already offer tax benefits.

How do I avoid a wash sale when reinvesting?

To avoid a wash sale, you must either wait at least 31 days before repurchasing the *same* security, or immediately reinvest the proceeds into a *different* security that is not considered "substantially identical." This could mean buying an ETF that tracks a different index or a stock in a different company within the same sector.

When is the best time to perform tax-loss harvesting?

While you can tax-loss harvest at any time, it's often most effective towards the end of the calendar year. This allows you to assess your year-to-date capital gains and losses and make final adjustments to optimize your tax position before the December 31st deadline for sales to settle.

Does tax-loss harvesting mean I'm losing money?

Yes, tax-loss harvesting means you are realizing an investment loss. However, the strategy is designed to turn that loss into a tax benefit, effectively reducing the overall impact of the loss on your net worth. It's about optimizing your after-tax returns, not about avoiding losses entirely.

Tax-Loss Harvesting: Complete Guide to Saving on Taxes |…