What is Tax-Loss Harvesting?

Tax-loss harvesting is an investment strategy that involves selling securities that have declined in value to realize a capital loss. This loss can then be used to offset capital gains, reducing tax liability. The sold position is typically replaced with a similar investment to maintain market exposure.

How Tax-Loss Harvesting Works

Basic Process:

1. Identify positions with unrealized losses
2. Sell the losing position to realize the loss
3. Purchase a similar (not identical) investment
4. Use the loss to offset gains

Tax Benefits

Offsetting Gains:

• Short-term losses first offset short-term gains
• Long-term losses first offset long-term gains
• Remaining losses offset opposite type gains

Excess Losses:

• Up to $3,000 can offset ordinary income annually
• Unused losses carry forward indefinitely

Wash Sale Rule

Critical Compliance Issue: The IRS wash sale rule disallows a loss deduction if you purchase a "substantially identical" security within 30 days before or after the sale.

Wash Sale Considerations:

• Applies across all accounts (including IRAs and spouse accounts)
• 61-day window (30 days before and after)
• Requires careful replacement security selection

Replacement Investment Strategies

Implementation Considerations

When to Harvest:

• Year-end planning
• After significant market declines
• When rebalancing portfolios
• Before large expected gains

Costs to Consider:

• Trading costs
• Potential tracking error
• Administrative complexity
• Risk of wash sale violation