Tax-Loss Harvesting

Tax-loss harvesting (TLH) is the deliberate sale of an investment that has declined in value to realize a capital loss. That loss can then be used to offset capital gains realized elsewhere in the portfolio, reducing your taxable income and current-year tax bill.

The key insight: you sell the losing position but immediately buy a similar fund to maintain your market exposure. You have not exited the market — you have simply converted an unrealized loss into a tax deduction.

Step	Example
Hold Vanguard S&P 500 ETF (VOO); it falls 12%	$10,000 cost basis → now worth $8,800
Sell VOO to harvest $1,200 loss	Realize a $1,200 capital loss
Immediately buy iShares Core S&P 500 ETF (IVV)	Stay fully invested in the market
Apply loss against $1,200 of capital gains elsewhere	$0 net capital gain; tax owed = $0

If losses exceed gains in the current year, up to $3,000 of net capital losses can offset ordinary income annually. Any remaining losses carry forward indefinitely to future years.

The IRS wash-sale rule (IRC Section 1091) disallows a capital loss if you buy a substantially identical security within 30 days before or after the sale. The window is 61 days total — 30 days before, the day of sale, and 30 days after.

If you trigger a wash sale, the disallowed loss is added to the cost basis of the replacement security rather than being lost permanently, but the current-year deduction is disallowed.

Action	Wash Sale?	Why
Sell VOO, buy IVV (different S&P 500 ETF)	No (usually)	Different fund, different issuer — not substantially identical
Sell VOO, buy VOO 20 days later	Yes	Same security within the 61-day window
Sell a stock, buy call options on the same stock	Yes	Options on substantially identical security trigger the rule
Sell fund in taxable account; spouse buys same fund	Yes	IRS aggregates spousal accounts

• Same stock: You cannot harvest a loss on AAPL and rebuy AAPL within 30 days.
• Index ETFs: Different providers tracking the same index (e.g., VOO vs IVV vs SPLG) are generally treated as not substantially identical, though the IRS has never issued a definitive ruling.
• IRAs: Buying the washed security in an IRA also triggers the rule — and worse, the loss is permanently lost, not just deferred.

Warning: The wash-sale rule applies across all your accounts including spouse accounts and IRAs. Never repurchase in an IRA after harvesting a loss in a taxable account within the 30-day window.

A systematic TLH process ensures you capture losses without accidentally triggering wash sales or changing your intended asset exposure.

• Step 1 — Identify candidates: Scan for positions with unrealized losses. Losses become worth harvesting when the tax savings exceed transaction costs and any bid-ask spread.
• Step 2 — Check wash-sale eligibility: Confirm you have not purchased this security (or a substantially identical one) within the prior 30 days.
• Step 3 — Execute the sale: Sell the losing position. Specify specific identification (SpecID) as your cost basis method to select the highest-cost lots and maximize the realized loss.
• Step 4 — Buy the replacement: Immediately purchase a similar-but-not-identical fund in the same asset class to maintain exposure.
• Step 5 — Wait 31 days: After 31 days, you may swap back to the original fund if you prefer it, without wash-sale risk.
• Step 6 — Record and report: Report harvested losses on Schedule D and Form 8949 of your federal return.

Asset Being Harvested	Suitable Replacement
Vanguard Total Stock Market (VTI)	iShares Core S&P Total US Market (ITOT)
Vanguard S&P 500 (VOO)	iShares Core S&P 500 (IVV) or SPDR S&P 500 (SPY)
iShares Core Int'l (IXUS)	Vanguard Total Int'l (VXUS)
Vanguard Total Bond (BND)	iShares Core Total Bond (AGG)

Tax-loss harvesting is not universally beneficial. Whether it helps depends on your tax rate, holding period, account type, and whether you actually have gains to offset.

Scenario	TLH Makes Sense?	Reason
High earner with significant capital gains	Yes	20% LTCG rate + 3.8% NIIT; high value per dollar of loss
Low income, 0% capital gains rate	No	Gains already tax-free; no benefit
Assets held in an IRA or 401(k)	No	No tax consequence inside tax-deferred accounts
Planning to donate appreciated shares	No	Donating appreciated shares avoids gains entirely
Losses available; large realized gains this year	Yes	Direct dollar-for-dollar offset of gains

• Short-term vs long-term matching matters: Short-term losses first offset short-term gains (taxed at ordinary rates); long-term losses offset long-term gains. Excess losses cross over.
• Transaction costs: The tax savings must exceed commissions, bid-ask spreads, and any expense ratio difference in the replacement fund.
• Deferral, not elimination: Harvesting a loss lowers your cost basis in the replacement fund, so future gains will be larger. TLH defers taxes — it does not eliminate them (unless you hold until death or donate the shares).

Tip: TLH is most valuable when losses are short-term (less than 12 months held), because short-term losses offset short-term gains taxed at ordinary income rates up to 37%.

Manual tax-loss harvesting requires time and vigilance. Several platforms automate the process, scanning for harvest opportunities daily.

Tool / Platform	Type	Notes
Betterment	Robo-advisor	Automated daily TLH included in all taxable accounts
Wealthfront	Robo-advisor	Automated TLH plus direct indexing for portfolios >$100k
Schwab Intelligent Portfolios Premium	Robo-advisor	Automated TLH on taxable accounts; $30/month flat fee
Fidelity / Vanguard (manual)	Brokerage	Use SpecID cost basis; set calendar reminders for down-market days
Passiv / Portfolio Visualizer	Software	Portfolio tracking; flags drift and loss candidates

Key settings to configure in any brokerage account:

• Set cost basis method to Specific Identification (SpecID) — not FIFO or average cost — to control which lots you sell.
• Enable unrealized gain/loss view so losses are visible at a glance.
• Track harvest activity in a spreadsheet to avoid wash-sale violations across multiple accounts.

Tip: Large market drops — corrections of 10% or more — are prime harvesting opportunities. Have your replacement fund list ready before volatility hits so you can act immediately.