Markets go up and down. When an investment is down, you may be able to use that loss to lower your tax bill. This move is called tax loss harvesting.
What Is It?
You sell an investment at a loss and use that loss to offset gains you made on other investments. Suppose your losses are bigger than your gains. In that case, you can reduce up to $3,000 of ordinary income this year ($1,500 if married filing separately). Any extra loss carries over to future years.
The 30‑Day “Wash Sale” Rule
If you sell at a loss and buy the same or nearly the same investment within 30 days before or after the sale, the IRS will not allow the loss right now. To stay safe, buy something similar—but not identical—for at least 30 days, so you remain invested.
Use It Only in Taxable Accounts
Loss harvesting does not apply inside 401(k)s, IRAs, or other tax‑deferred accounts. It is for regular brokerage accounts.
Short‑Term vs. Long‑Term
Losses first offset the same type of gains (short‑term vs. long‑term). After that, any remaining loss can reduce other gains, up to $3,000 of ordinary income. Simple idea: losses can soften the tax bite.
When does it help?
It can help in a year with big gains, when trimming a large holding, during year‑end rebalancing, or after a market drop. State taxes also matter; in high‑tax states, the savings can be larger.
Risks to Note
You might miss a quick rebound while you sit out 30 days, your mix could drift from your plan, and trading costs or fund payouts may reduce the benefit. Records matter, too.
How an Accountant Helps?
An accountant tracks gains, losses, and wash‑sale risks across all your accounts (and your spouse’s), helps choose smart replacements, and makes sure the tax forms are clean. Used well, loss harvesting is a steady tool, not a gamble.
Tax loss harvesting will not fix a weak plan, but it can reduce taxes while keeping you invested. Talk with us to see if it fits your goals this year.