Tax-loss harvesting

Tax-loss harvesting is selling an investment at a loss to realize that loss for tax purposes, while maintaining comparable market exposure — deferring tax rather than eliminating it.

The mechanics

A position trading below its cost basis is sold, realizing a loss that can offset gains and, up to a limit, ordinary income. The proceeds are reinvested in something similar enough to keep the allocation intact.

The wash-sale rule

Buying the same or a substantially identical security within thirty days before or after the sale disallows the loss. The replacement must be similar enough to preserve exposure and different enough to avoid the rule, which is a narrower path than it sounds.

The rule applies across a household’s accounts, including retirement accounts and a spouse’s, which is where it most often catches people out.

It defers rather than eliminates

Selling at a loss and rebuying lowers the cost basis, so a larger gain is realized later. The benefit is the time value of the deferred tax and any difference between the rates applying now and later.

Describing it as tax savings overstates it.

Where it does not apply

Tax-deferred accounts, where losses have no tax consequence. And for anyone whose circumstances mean realized gains are taxed at zero, the deferral has nothing to defer.