Tax Loss Harvesting
An investment strategy of selling assets at a loss to offset capital gains or ordinary income, reducing current tax liability while maintaining portfolio exposure.
FAQs
What is the wash sale rule and how does it affect tax loss harvesting?
The wash sale rule disallows a capital loss if you buy the same or substantially identical security within 30 days before or after the sale. To harvest the loss, you must wait 31 days before repurchasing, or immediately buy a similar but not identical investment (e.g., sell an S&P 500 ETF and buy a different broad market ETF) to maintain market exposure.
Is tax loss harvesting only valuable for high earners?
Tax loss harvesting is most valuable for investors in higher tax brackets (23.8% long-term capital gains rate for high earners vs. 0–15% for others) and for those with significant taxable investment accounts. Investors in low tax brackets or primarily in tax-advantaged accounts (IRA, 401k) see limited benefit because gains are already tax-deferred or tax-free.
What happens to harvested losses that aren't used in the current year?
Capital losses that exceed capital gains in a year are first applied against up to $3,000 of ordinary income. Any remaining net capital loss is carried forward indefinitely (not limited to a specific period) to offset future capital gains and income. The character (short-term vs. long-term) of the loss is preserved in carryforward.
Related Terms
R&D Tax Credit
A federal and state tax incentive allowing businesses to claim a credit for qualifying research and development expenditures.
Bonus Depreciation
A tax incentive allowing businesses to immediately deduct a large percentage of the cost of eligible property in the year it is placed in service.
Estimated Tax
Quarterly tax payments required from self-employed individuals and businesses that expect to owe $1,000 or more in taxes not covered by withholding.