The complete guide to tax-loss harvesting

Tax-loss harvesting is one of the most overlooked strategies available to individual investors. Done right, it can save you thousands of dollars in taxes each year—without changing your overall investment approach.

What is tax-loss harvesting?

It's the practice of selling investments at a loss to offset capital gains elsewhere in your portfolio. The IRS allows you to use these losses to reduce your taxable income, effectively turning a losing investment into a tax advantage.

How it works in practice

Say you have a $5,000 gain on Stock A and a $3,000 loss on Stock B. By selling Stock B, you can offset $3,000 of your gain—reducing your taxable amount to just $2,000. If you have more losses than gains, you can even deduct up to $3,000 against ordinary income annually.

The wash sale rule

There's one important caveat: the wash sale rule. If you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale, the IRS will disallow your loss deduction.

The solution? Replace the sold position with a similar but not identical investment. For example, swap one S&P 500 ETF for another with slightly different holdings.

When should you harvest losses?

Tax-loss harvesting opportunities can appear at any time, but they're most common during market downturns. Year-end is also a popular time, as investors look to optimize their tax situation before December 31st.

Common mistakes to avoid

Ignoring holding periods is a frequent error. Short-term gains are taxed at your ordinary income rate, while long-term gains receive preferential treatment. Harvesting a short-term loss while creating a short-term gain defeats the purpose.

Let AI do the heavy lifting

Manually tracking harvesting opportunities across multiple accounts is time-consuming. AI-powered tools can identify these opportunities in real-time, flag wash sale risks, and estimate your potential tax savings—so you never miss a valuable window.

Tax-loss harvesting isn't about timing the market. It's about being smart with the positions you already hold.