Tax-Loss Harvesting

Tax-loss harvesting is a strategy of selling investments that have declined in value to realize losses that offset capital gains, reducing your tax bill while maintaining your investment strategy.

How It Works:

1. Identify investments trading below your cost basis
2. Sell to realize the loss
3. Use loss to offset gains (and up to $3,000 ordinary income)
4. Reinvest in similar (not identical) investment
5. Carry forward unused losses to future years

Example:

• You have $10,000 in gains from Stock A
• Stock B has a $10,000 loss
• Sell Stock B → $0 net taxable gains
• Buy similar ETF to maintain market exposure
• Tax savings: $1,500-$3,500+ depending on tax bracket

Wash Sale Rule: You CANNOT buy "substantially identical" securities within 30 days before or after the sale:

• ❌ Sell AAPL, buy AAPL within 30 days
• ✅ Sell AAPL, buy technology ETF
• ✅ Sell S&P 500 fund, buy total market fund
• ❌ Sell VTI, buy VTSAX (substantially identical)

Benefits:

• Reduce current year taxes
• Maintain market exposure
• Compound tax savings over time
• No limit on losses to harvest

Best Practices:

• Review portfolio quarterly
• Consider transaction costs
• Document all trades
• Use tax-advantaged accounts for frequent trading
• Robo-advisors often automate this