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Tax-loss harvesting is a strategy that uses losing investments to reduce your tax bill. You sell an investment at a loss, use that loss to offset gains elsewhere, and buy a similar investment to keep your portfolio on track.
Done right, it can save thousands of dollars in taxes every year — without changing your long-term investment strategy.
Rates and figures as of May 2026.
How Tax-Loss Harvesting Works
Here is the basic sequence:
- You own an investment that has dropped in value.
- You sell it at a loss — this “realizes” the loss on paper.
- The loss offsets your capital gains for the year, reducing your taxable income.
- You immediately buy a similar (but not identical) investment to maintain your market exposure.
An Example
Say you have $10,000 in capital gains from selling appreciated stock. You also own a bond fund that is down $4,000. If you sell the bond fund, you have a $4,000 loss. That loss reduces your net capital gains to $6,000. At a 15% capital gains rate, you save $600 in taxes.
The Wash-Sale Rule
The IRS has a rule that blocks tax-loss harvesting if done sloppily. If you sell an investment at a loss and buy the “substantially identical” security within 30 days before or after the sale, the loss is disallowed.
This is called the wash-sale rule. The 30-day window applies both before and after the sale — 61 days total.
To avoid this: After selling a losing investment, buy a similar but not identical replacement. For example, sell a Vanguard S&P 500 ETF (VOO) and buy a Fidelity S&P 500 ETF (FZROX), or a total market fund. After 31 days, you can switch back if you want.
Which Losses Can You Harvest?
You can harvest losses on:
- Stocks and ETFs in taxable brokerage accounts
- Bond funds
- Cryptocurrency (crypto is exempt from wash-sale rules as of 2026)
- Mutual funds (with attention to timing)
You cannot harvest losses in tax-advantaged accounts (401k, IRA). The accounts don’t generate taxable gains, so losses have no tax value inside them.
Short-Term vs. Long-Term Loss Priority
Short-term losses offset short-term gains first. Long-term losses offset long-term gains first. If you have excess losses of one type after offsetting gains, they can then offset gains of the other type.
Short-term losses are more valuable because short-term gains are taxed at a higher rate.
The $3,000 Annual Deduction
If your total losses exceed your total gains, you can deduct up to $3,000 of the net loss against ordinary income each year. Remaining losses carry forward to future years indefinitely.
Over time, a large carryforward balance becomes a tax asset you can use to offset future gains without paying any taxes.
When to Harvest Losses
- During market downturns — more positions are likely at a loss
- At year-end — review all positions in October/November before December 31
- After a large capital gain event (sale of property, business, or a large stock position)
- Continuously — automated platforms like Betterment and Wealthfront do this daily
Should You Use a Robo-Advisor for TLH?
Yes, if you have significant taxable assets. Betterment and Wealthfront offer automated daily tax-loss harvesting on taxable accounts. They scan your portfolio for harvesting opportunities every day and execute the trades automatically.
Manual harvesting is feasible with a focused portfolio (5–10 ETFs), but robo-advisors find more opportunities across a larger portfolio.
The Bottom Line
Tax-loss harvesting doesn’t change what you own in the long run — it just reduces how much tax you pay on gains. Do a year-end review every November, identify any positions at a meaningful loss, sell and replace them with similar assets, and watch your tax bill drop. The wash-sale rule is the main trap to avoid: wait 31 days before buying back the same security.
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