Tax Loss Harvesting
Selling a losing investment sounds like the opposite of a strategy — until you see what it does to your tax bill.
What Is It
Tax loss harvesting means selling an investment that’s worth less than you paid for it, realizing that loss for tax purposes, then reinvesting the proceeds in something similar — not identical — so your money stays invested rather than sitting in cash. The realized loss offsets capital gains you’ve realized elsewhere in your portfolio that year, dollar for dollar. If losses exceed gains, up to $3,000 of the excess can also offset ordinary income for the year, and anything beyond that carries forward to future tax years indefinitely — nothing is wasted, even in a year with more losses than you can use right away.
Why It Matters
This only applies in a taxable brokerage account. Inside a 401(k) or IRA, gains and losses don’t have current-year tax consequences either way, so there’s no loss to harvest — the strategy is specific to money that’s already being taxed as it grows.
The real technical trap is the wash sale rule: buying back the same security, or one the IRS considers “substantially identical,” within 30 days before or after the sale disallows the loss entirely. That’s why the replacement investment matters — swapping into a similar-but-not-identical fund, a different index tracking a comparable but distinct benchmark, for instance, keeps your market exposure intact without triggering the rule. Exactly what counts as “substantially identical” has real nuance beyond what’s covered here, so when a specific swap is close to the line, that’s worth a conversation with a tax professional rather than a guess.
Quick Example
An investor realizes a $5,000 loss on a position that’s underperformed. That same year, they also have $2,000 in realized capital gains elsewhere in the portfolio — the loss fully offsets those gains first, then the remaining $3,000 offsets ordinary income, landing exactly on the annual cap. Nothing is left over to carry forward in this particular example — a clean, round number chosen to illustrate the mechanic, not a claim that real harvesting outcomes usually land this neatly.