Tax-loss harvesting means selling an investment for less than its tax cost so the loss may help on a tax return.
What it means
A tax loss can offset certain capital gains. If losses are larger than gains, tax rules may allow a limited amount against other income and carry the rest forward.
The investment result and the tax result are two different things. A tax benefit does not make a bad investment result good.
A simple example
You sell one fund with a $10,000 loss and another investment with a $10,000 gain. If the tax rules allow it, the loss may offset the gain, leaving no net capital gain from those two sales.
But the tax move also changes what you own. If you immediately buy the same or a substantially identical investment, the wash-sale rule may delay the loss. A careful plan looks for a replacement that keeps the investment strategy on track without breaking the tax rule. Saving tax is useful only if the new portfolio still makes sense.
What people often miss
The wash-sale rule can delay a loss if you buy the same or a substantially identical investment too close to the sale.
Trades in a spouse's account or another account can matter. The broker's tax form may not see the whole household picture.
Three questions worth asking
- What gain will this loss offset?
- Could a wash sale apply anywhere in the household?
- Does selling change the investment plan?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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