Tax-loss harvesting
Also: tax-loss harvesting, TLH, loss harvesting
The practice of selling investments at a loss to generate capital losses, then reinvesting in a similar but not substantially identical security. Losses offset capital gains and up to $3,000 of ordinary income.
Tax-loss harvesting converts paper losses into tax savings without exiting the market. The investor sells a position at a loss, books the loss on Form 8949, and buys a similar but not substantially identical replacement. The replacement keeps market exposure intact. Wash-sale rules prohibit repurchasing the same or substantially identical security within 30 days before or after the sale, so the replacement is typically a different fund tracking a similar index. Losses first offset capital gains, then up to $3,000 of ordinary income annually, with the remainder carried forward.
Example: an engineer owns VOO (S&P 500 ETF) bought at $450 per share, now trading at $410. She sells 500 shares for a $20,000 realized loss and immediately buys IVV or SPLG (different S&P 500 ETFs). The $20,000 loss offsets her concurrent RSU sale gains. Her market exposure does not change materially.
Common mistake: harvesting a loss and replacing with the same fund in a spouse’s account or IRA, triggering the wash-sale rule across the taxpayer unit. The loss is disallowed.
Tax-loss harvesting matters in every down market, throughout every calendar year at the portfolio level, and as the automated engine behind direct indexing.