Tax-loss harvesting means selling an investment in a taxable brokerage account at a loss so you can use that loss to offset gains (and sometimes a limited amount of ordinary income) on your Form 1040. It is an accounting tactic, not a way to “beat” the market. It does nothing useful inside a 401(k) or IRA where gains are not taxed the same way year to year (Taxable vs tax-advantaged accounts).
This guide stays at household basics: when harvesting helps, wash-sale traps, and a simple ETF example. It is not a substitute for a CPA on complex trades.
Where harvesting applies
| Account | Harvesting usually relevant? |
|---|---|
| Taxable brokerage (Fidelity, Vanguard, Schwab, E*TRADE) | Yes—capital gains/losses realized on sales |
| Traditional / Roth IRA, 401(k) | No—different tax timing; wash-sale rules can still interact if you buy “substantially identical” securities across accounts |
| HSA invested | Generally not the same annual capital-gain game as a taxable brokerage |
You need a basic map of capital gains (short-term vs long-term) before the harvest math matters.
The simple idea
- An ETF or fund lot is worth less than your cost basis.
- You sell, realizing a capital loss.
- That loss offsets capital gains realized the same year; up to $3,000 of net capital loss may offset ordinary income per year for many filers, with the rest carried forward (confirm current IRS rules when you file—Filing taxes for beginners).
- You stay invested by buying a similar but not substantially identical fund so you are not sitting in cash for decades over a tax entry.
Prefer broad index funds and ETFs so replacements are easy to find. Beginner portfolio context: Investing basics.
Worked example
Alex bought $10,000 of a total U.S. stock ETF in a Schwab taxable account. It is now worth $8,200. Alex also sold another holding earlier this year for a $1,500 long-term gain.
Alex sells the ETF, realizing an $1,800 loss. The loss offsets the $1,500 gain entirely; $300 remains as a net capital loss that may reduce ordinary income (subject to the annual limit and Alex’s full return). Alex immediately buys a different broad U.S. equity ETF that tracks a similar market but is not the same fund share class the IRS would treat as substantially identical—then holds for the long term.
If instead Alex bought the same ETF back within 30 days before or after the sale, the wash-sale rule can disallow the loss for now and adjust basis on the new shares. Dividend reinvestment in the same security can also create wash-sale noise—turn off auto-DRIP on the lot you plan to harvest if needed. Full window, IRA repurchase traps, and basis mechanics: Wash sale rule basics.
When skipping harvest is smarter
- Your only balances are IRAs/401(k)s.
- Trading costs, bid-ask spreads, or a taxable gain on a forced sale elsewhere erase the benefit.
- You would repurchase the identical security inside the wash window.
- The loss is tiny relative to the paperwork time.
- You need the money for a near-term goal—harvesting is not an emergency-fund strategy.
Automated “tax-loss harvesting” features at some robo-advisors can help disciplined index investors; read how they pick replacements and how they handle wash sales across household accounts.
Harvesting only applies in taxable accounts—wrapper basics: Taxable brokerage accounts.
Some taxable investors pursue stock-level harvesting through direct indexing instead of a single ETF - fees and wash-sale complexity apply.
Checklist
- Confirm the lot lives in a taxable account and note cost basis.
- Estimate gains already realized this year.
- Sell the loser; document proceeds and dates.
- Buy a similar, not substantially identical, replacement if you want market exposure.
- Avoid repurchase of the same security within the wash window across accounts you control.
- Keep 1099-B data for filing; track leftovers with Capital loss carryforward basics and ask a tax pro if wash sales get messy.
In a low-income year the mirror tactic is realizing gains on purpose while LTCG rates are 0%: Tax-gain harvesting basics.
Pick the loss lot on purpose: Tax lot identification basics.
Educational only. Not tax, legal, or investment advice. IRS rules on wash sales, loss limits, and carryforwards are detailed—verify with current publications or a qualified tax professional.