Decision Guide · Reviewed 6 September 2026
Sell losses to offset gains, reduce taxable income, and maintain portfolio allocation—every tax year.
Tax-loss harvesting is one of the few "free" tax-reduction strategies available to all investors. Selling underwater securities to capture losses can save $300–$3,000+ annually, depending on portfolio size and gains. The key is discipline and wash-sale awareness.
The core strategy
Harvest losses: Sell any security trading below cost basis. Capture the capital loss. Immediately rebuy the same or similar asset (avoiding wash-sale violations). Result: you've locked in a tax loss while maintaining your portfolio.
Offset gains: Use captured losses to offset any capital gains (long-term or short-term) you've realized during the year. Dollar-for-dollar reduction in taxable capital gains.
Reduce ordinary income: Losses exceeding gains (up to $3,000/year) deduct against ordinary income. Excess losses carry forward indefinitely.
Scenario: $1M portfolio with diversified holdings
| Holding | Cost Basis | Current Value | Gain/(Loss) |
|---|---|---|---|
| Total Market ETF | $150,000 | $152,000 | +$2,000 |
| Tech Sector ETF | $200,000 | $175,000 | −$25,000 |
| Individual Dividend Stock | $100,000 | $95,000 | −$5,000 |
| Bonds ETF | $300,000 | $298,000 | −$2,000 |
| International Stocks | $250,000 | $280,000 | +$30,000 |
Tax-loss harvesting example
Year gains realized: Sold $50K of international stocks, captured $30K long-term gain (tax: $4,500 at 15%).
Without harvesting: Taxable gain = $30,000 → Tax = $4,500
With harvesting: Sell tech sector (−$25K loss) and dividend stock (−$5K loss) = −$30,000 losses. Use $30K losses to offset $30K gain = $0 taxable gain → Tax = $0. Save: $4,500.
How to reinvest without wash-sale violation: After selling the tech sector ETF, immediately buy a different tech ETF (or broad market) to maintain allocation. Same for the individual stock—buy a similar dividend stock or a dividend ETF.
How to execute safely (avoid wash-sale penalties)
Wash-sale rule: If you sell a security at a loss, you cannot buy the same or "substantially identical" security within 30 days before or after (61-day window total). Violation disallows the loss and adds it to the new cost basis (delayed tax benefit, not eliminated).
- Exact same ticker (QQQ)? Wait 30 days or buy a different ETF (VUG, VGT—different tech ETFs).
- Same individual stock (Apple)? Sell Apple, wait 30 days, or buy a tech ETF instead.
- Same sector/type? Different tickers are generally OK. VTSAX (total US stock) and VTI are considered identical. Be careful.
- Safest approach: Sell at loss on Monday. Buy a different fund (same asset class, different manager/holdings) on Tuesday. Wait the full 30 days before repurchasing the original fund if desired.
Annual harvest calendar
- September–November: Identify underwater positions (losses > 5% of cost basis). Prioritize largest unrealized losses.
- November–December: Execute harvests. Reinvest immediately in similar (but not identical) holdings.
- January–February: Stay out of originally harvested securities during the 30-day window. Monitor for wash-sale risks.
- March–December: Resume normal rebalancing and reinvesting.
- Year-end: Tally all gains and losses for tax reporting. Your broker provides Form 8949 summary.
When NOT to harvest (or delay harvesting)
- No gains to offset: If you've realized no capital gains, harvesting only offsets $3K ordinary income (rest carries forward). Benefit is reduced but still valuable.
- Within tax-advantaged accounts: Losses and gains in 401k/IRA don't trigger capital gains tax. Harvesting is pointless (no tax benefit). But your losses are also irrelevant—account is tax-deferred anyway.
- Near year-end with uncertain stock price: If a position might recover by December 31, wait. Once you harvest, the clock resets. Selling too early sacrifices upside.
- Concentrated positions (25%+ of portfolio): Harvesting forces diversification, which may be good for risk management but reduces your hedge position. Consider tax cost vs. diversification benefit.
Tax benefit scenarios (taxable brokerage account)
| Scenario | Realized Gain | Harvested Loss | Taxable Capital Gain | Tax at 15% |
|---|---|---|---|---|
| No harvest | $50,000 | $0 | $50,000 | $7,500 |
| Harvest $30K loss | $50,000 | $30,000 | $20,000 | $3,000 |
| Harvest $50K loss | $50,000 | $50,000 | $0 | $0 |
| Harvest $70K loss | $50,000 | $70,000 | $0 (use $20K vs. ordinary income) | $0 cap gains + $3K ord. income reduction |
Tools to track and plan
- Your broker's "unrealized losses" report (Fidelity, Schwab, Vanguard all provide this)
- Spreadsheet model comparing tax benefit vs. transaction costs (typically < $10 per trade now)
- Mark harvested securities and 30-day windows on a calendar to avoid wash-sale violations
Disclaimer: Tax-loss harvesting has complex wash-sale and timing rules. Consult a tax professional (CPA/tax attorney) before implementing, especially for large portfolios or complicated scenarios. This is educational information, not tax advice.