Definition
Tax-loss harvesting is selling investments at a loss to offset capital gains and a limited amount of ordinary income.
How It Works
Realized losses first offset realized gains, then up to a limited amount of ordinary income per year, with any excess carried forward. The proceeds are typically reinvested in a similar but not substantially identical asset to stay in the market.
Example
An investor sells a losing position to offset gains taken elsewhere in the year, then buys a comparable fund to maintain market exposure.
When It Works Best
It works best in volatile markets, in years with large gains to offset, and in accounts large enough to make the effort worthwhile. Direct indexing automates it.
Who It Applies To
Investors with taxable accounts.
Watch-Outs
The wash sale rule disallows the loss if the same or a substantially identical security is repurchased within 30 days.
