What is tax-loss harvesting?

Tax-loss harvesting is a strategy that can help investors reduce their tax burden by using investment losses to offset gains. This approach is only applicable to taxable brokerage accounts and is not available for retirement accounts such as IRAs or 401(k)s.

What Is Tax-Loss Harvesting?

Tax-loss harvesting involves selling an investment that has experienced a loss to realize that loss for tax purposes. The investor can then purchase a similar, but not identical, security to maintain their overall market exposure. This maneuver helps avoid violating the IRS’s wash sale rule. That rule disallows the deduction if the same or a substantially identical security is purchased within 30 days before or after the sale.

Tax Benefits of Harvesting Losses

You can deduct up to $3,000 of capital losses from your ordinary taxable income each year.
If your losses exceed that limit, the remaining amount can be carried forward indefinitely to offset future capital gains or taxable income.

Is It Right for Everyone?

While tax-loss harvesting can be a powerful tool, it isn’t ideal for every investor. Older individuals, for instance, may not benefit as much from carrying forward losses because they might not live long enough to fully use them. Additionally, the strategy requires careful attention to portfolio composition and timing, making it important to avoid costly mistakes like triggering a wash sale.

Get Personalized Advice

Tax-loss harvesting can be a valuable tactic within a larger tax and investment strategy, but it’s not one-size-fits-all. If you’re considering this approach, it’s wise to consult a financial advisor. They will be able to help you determine if it’s the right strategy for you.

Schedule a complimentary consultation and discover how our services can help you achieve financial freedom.

William Medcalf
Senior Financial Planning Associate, Wiser Wealth Management

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