Tax-Loss HarvestingTLH
Tax-loss harvesting means selling investments that are below their purchase price to realise a capital loss, then using that loss to reduce the tax on capital gains. In the US, leftover losses can offset up to $3,000 of ordinary income a year and carry forward.
Losing positions are painful, but they can still be useful. Tax-loss harvesting turns paper losses into realised ones so they can cancel out taxable gains elsewhere in the portfolio. Done well, it lowers this year's tax bill without changing your market exposure much. This entry explains how it works under US rules, a worked example, the limits, and the wash sale trap. Tax treatment differs by country, so local rules always come first.
- Category
- Trading Basics
- Reading time
- 4 min
- Also called
- Tax loss harvesting, Harvesting losses, Tax-loss selling
- Updated
Tax-loss harvesting in plain words
When you sell a capital asset for less than its adjusted basis, the difference is a capital loss; holding it more than a year makes it long-term, otherwise short-term.1
Realised losses first offset capital gains, and up to $3,000 of any remaining net loss can be deducted from ordinary income each year ($1,500 if married filing separately).2
Any loss beyond that limit is not wasted: it carries over to future years.3
How tax-loss harvesting works, step by step
Find positions below cost
Compare market value with each lot's basis. See Cost Basis.
Check what gains you have
Realised gains this year are what losses can offset. See Capital Gains Tax.
Sell to realise the loss
Only realised losses count, not paper losses.
Stay invested if you want
Buy a similar but not substantially identical asset.
Avoid the 30-day trap
Do not buy the same security back too soon. See Wash Sale Rule.
Track carryovers
Unused losses roll into next year.
Worked examples
Example 1 — Losses bigger than gains
$23,000 used this yearYou have $20,000 of realised gains and harvest $25,000 of losses.
| Gains offset | $20,000 |
| Deducted from income | $3,000 |
| Carried forward | $25,000 − $20,000 − $3,000 = $2,000 |
Losses wipe out the gains, up to $3,000 more reduces ordinary income, and the rest carries forward.2
Example 2 — The tax saved
$900 savedYou realise a $6,000 gain and harvest a $6,000 loss. Assume a 15% capital gains rate.
| Tax without harvesting | $6,000 × 15% = $900 |
| Net gain after harvesting | $0 |
| Tax saved | $900 |
Realised losses can offset realised gains, lowering the tax due for the year.3
Example 3 — Deferral, not forgiveness
Tax deferredYou sell a fund at $8,000 (basis $10,000) and buy a similar fund for $8,000. Years later you sell it for $12,000.
| Loss harvested now | $2,000 |
| Later gain on the new fund | $12,000 − $8,000 = $4,000 |
The lower basis of the replacement means a larger future gain; harvesting mostly delays tax rather than erasing it. See Cost Basis.
Short-term vs long-term losses (US)
| Aspect | Short-term | Long-term |
|---|---|---|
| Holding period | One year or less | More than one year |
| First offsets | Short-term gains | Long-term gains |
| Typical value | Higher (offsets higher-taxed gains) | Lower |
| Carryforward | Keeps its character | Keeps its character |
When investors harvest losses
Year-end review
Checking the portfolio before the tax year closes.
After a sell-off
Market drops create losses worth booking. See Bear Market.
Rebalancing
Selling losers while restoring target weights. See Rebalancing.
Offsetting a big gain
Balancing a large profit taken elsewhere.
Advantages and disadvantages
Advantages
- Lowers this year's tax bill.
- Unused losses carry forward.
- Can be combined with rebalancing.
Disadvantages
- Mostly defers tax rather than eliminating it.
- Wash sale rules limit buybacks.
- Only useful in taxable accounts.
- Trading costs and spreads eat into the benefit.
Going deeper
Read as far as you need. Each level builds on the one before it.
Only taxable accounts
Beginner
Gains and losses inside tax-advantaged retirement accounts are not taxed or deducted year by year, so harvesting applies to ordinary taxable brokerage accounts. A capital loss is measured against the asset's adjusted basis.1
Staying in the market
Intermediate
To avoid a wash sale, investors swap into an asset that keeps similar exposure without being substantially identical, or wait more than 30 days to buy back.4 See Index Fund.
Character and order matter
Advanced
Short-term and long-term losses first offset gains of the same type, and the $3,000 income limit applies only to the net loss left over.2 Since short-term gains are usually taxed at higher rates, short-term losses tend to be the more valuable ones.
Common mistakes
Buying back too soon
A repurchase within 30 days disallows the loss.
Selling just for tax
A good investment sold only for the tax can cost more than it saves.
Forgetting other accounts
A spouse's or IRA purchase can trigger a wash sale.
Applying US rules abroad
Limits and carryover rules differ by country.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Harvesting turns paper losses into realised, deductible ones.
- Losses offset gains, then up to $3,000 of income (US).
- Unused losses carry forward.
- Watch the 30-day wash sale rule.
- It mainly defers tax — and rules differ by country.
Frequently asked questions
Is tax-loss harvesting worth it for small accounts?
Can I harvest losses in December and buy back in January?
Does it work for crypto?
Further learning
- Wash Sale Rule
The main trap to avoid.
- Capital Gains Tax
What the losses offset.
- Cost Basis
How gains and losses are measured.
- Rebalancing
Combine harvesting with portfolio upkeep.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Internal Revenue Service. Topic no. 409, Capital gains and losses (opens in a new tab) Checked .
- Charles Schwab. How to Cut Your Tax Bill with Tax-Loss Harvesting (opens in a new tab) Checked .
- Fidelity. What is tax-loss harvesting and how does it work? (opens in a new tab) Checked .
- Internal Revenue Service. Publication 550, Investment Income and Expenses (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.