What is Tax-Loss Harvesting?
Tax-loss harvesting is a tax optimization strategy where you sell investments that have declined in value to realize a capital loss. These losses offset capital gains from other investments, reducing your overall tax liability.
The Core Benefit
If you have $10,000 in capital gains and harvest $10,000 in losses, you owe $0 in capital gains tax for that year. The losses cancel out the gains dollar-for-dollar.
But it goes beyond just offsetting gains. In the US, if your losses exceed your gains, you can deduct up to $3,000 against ordinary income. Any remaining losses carry forward indefinitely to future tax years.
How Tax-Loss Harvesting Works
Example: Sarah's Tax Savings
Sarah bought 100 shares of Tech Company at $100/share ($10,000 total). The stock dropped to $70/share ($7,000 current value). She also sold another stock earlier this year for a $5,000 gain.
The Step-by-Step Process
- Identify losing positions - Review your portfolio for investments trading below your cost basis. Use your portfolio tracker to quickly spot candidates.
- Evaluate the opportunity - Consider the loss size, your tax bracket, and whether you still believe in the investment long-term.
- Sell the position - Execute the sale to realize the loss. Note the date for wash sale tracking.
- Buy a similar investment (optional) - If you still want exposure to that sector, immediately buy a similar but not identical investment.
- Wait 30+ days if repurchasing same security - To avoid wash sale rules, wait at least 31 days before buying back the same security.
The Wash Sale Rule Explained
The wash sale rule prevents you from claiming a tax loss if you buy a "substantially identical" security within 30 days before or after the sale. This creates a 61-day window.
The 61-Day Wash Sale Window
What Triggers a Wash Sale?
| Action | Triggers Wash Sale? |
|---|---|
| Buy same stock within 30 days | Yes |
| Buy call option on same stock | Yes |
| Buy same stock in IRA | Yes* |
| Spouse buys same stock | Yes |
| Buy similar but different stock | No |
| Buy ETF tracking same index | Maybe |
| Wait 31+ days then repurchase | No |
Pro Tip: The ETF Swap
Selling VOO (Vanguard S&P 500 ETF) and immediately buying IVV (iShares S&P 500 ETF) is a common strategy. They track the same index but are considered different securities. Same exposure, realized loss.
Smart Tax-Loss Harvesting Strategies
Direct Swap Strategy
Sell the losing position and immediately buy a similar (but not identical) investment. Example: Sell VTI, buy ITOT. Maintains market exposure while realizing the loss.
Rebalancing Opportunity
Use losses as a chance to rebalance. Harvest losses in growth stocks, buy value stocks to adjust your allocation. Kill two birds with one stone.
Don't: Wait Until Year-End
Monitor throughout the year and harvest when opportunities arise, especially during market downturns. Waiting until December limits your options.
Don't: Let Taxes Drive Everything
Never sell a great long-term investment just for a small tax benefit. Investment fundamentals should come first. Tax optimization is secondary.
Rules by Country
United States Tax Rules
- Offset rule: Losses offset gains dollar-for-dollar
- Ordinary income: Excess losses deduct up to $3,000/year ($1,500 if married filing separately)
- Carryforward: Unused losses carry forward indefinitely
- Wash sale window: 30 days before and after (61-day total)
- Short vs long-term: Different rates apply (short-term taxed as ordinary income)
United Kingdom Tax Rules
- CGT allowance: £3,000 for 2025/26 (reduced from £6,000)
- Offset rule: Losses offset gains in the same tax year
- Carryforward: Excess losses carry forward indefinitely
- Bed and breakfasting: 30-day rule applies (similar to US wash sale)
- ISA accounts: Gains are tax-free—no need for harvesting in ISAs!
With the reduced CGT allowance, tax-loss harvesting is particularly valuable for UK investors. Learn more in our UK ISA guide.
Canada Tax Rules
- Inclusion rate: 50% of capital gains are taxable
- Offset rule: Losses offset gains; can carry back 3 years or forward indefinitely
- Superficial loss: 30-day window (similar to US wash sale)
- Applies to: You, your spouse, and controlled corporations
- TFSA/RRSP: Gains are sheltered—no harvesting needed in registered accounts
Frequently Asked Questions
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