Tax-Loss Harvesting

Tax-loss harvesting means selling a holding that is down in order to book the loss on purpose. The realized loss offsets realized gains elsewhere in your portfolio, and once gains are exhausted it can offset up to $3,000 of ordinary income a year, with anything left over carried forward indefinitely.

You do not have to leave the market to do it. The standard move is to sell the loser and immediately buy something similar but not identical — swapping one broad US index fund for another that tracks a different index keeps your allocation intact while the loss is captured.

That "not identical" qualifier is the wash-sale rule and it is the whole constraint. Buying the same or a substantially identical security within 30 days before or after the sale disallows the loss, which is instead folded into the basis of the replacement shares. The window is 61 days in total, and it follows you across accounts, including an IRA and, in the IRS's view, a spouse's accounts.

The benefit is smaller than it first appears, because selling low resets your cost basis low. Much of what harvesting delivers is deferral rather than forgiveness — you pay a larger gain later in exchange for a deduction now. That trade is still worth having, since money kept today compounds, and it becomes permanent if the shares are eventually inherited and receive a stepped-up basis.

It only works in a taxable brokerage account. Losses inside a 401(k) or IRA are not deductible, so harvesting has no effect there at all, which is worth remembering when a robo-advisor advertises the feature.