Topic 09 · 5 min read
Harvesting Losses in Your Portfolio
Turning a down position into a real tax saving.
Selling an investment that has dropped locks in a loss you can use against gains. Done deliberately, it lowers this year's tax without changing how your money is actually invested.
What to know
- Losses offset gains first
- Realized losses cancel realized gains dollar for dollar, matching short-term against short-term and long-term against long-term first.
- Then $3,000 of ordinary income
- Any leftover loss reduces up to $3,000 of ordinary income per year, and the remainder carries forward indefinitely.
- The wash-sale rule
- Buying the same or a substantially identical security within 30 days before or after the sale disallows the loss and rolls it into the new basis.
- Staying invested
- Moving into a similar but not identical fund keeps market exposure while the loss counts — the standard way harvesting is done.
- Watch the basis method
- Specific-lot identification lets you sell the highest-cost shares; default averaging may waste the opportunity.
The tax benefit
Gains this year are offset, up to $3,000 of ordinary income is reduced, and any excess loss waits to shelter future gains.
Worked example
Offsetting a good year
An investor with $12,000 of realized gains sells positions carrying $9,000 of losses. Only $3,000 of gain is taxed, and the portfolio stays invested through similar replacement funds.
Watch out for
- The wash-sale rule follows you across accounts, including an IRA.
- Harvesting inside a retirement account does nothing; it is already sheltered.
- Do not let the tax tail wreck a sound investment plan.
Terms from this topic
Tax-loss harvestingWash saleCapital loss carryforwardCost basis method
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