Question 1

What is tax-loss harvesting?

Accepted Answer

Tax-loss harvesting is the strategy of selling investments at a loss to offset capital gains and reduce your tax bill. Losses first offset gains of the same type (short-term offsets short-term, long-term offsets long-term), then offset gains of the other type, and finally up to $3,000 of ordinary income per year. Unused losses carry forward indefinitely to future tax years.

Question 2

What is the wash sale rule?

Accepted Answer

The wash sale rule prevents you from claiming a tax loss if you buy a 'substantially identical' security within 30 days before or after selling at a loss. This includes purchases in any of your accounts (IRA, 401k, taxable) and applies to stocks, bonds, ETFs, and mutual funds. To maintain market exposure, you can buy a similar but not identical investment — for example, switching from one S&P 500 ETF to another.

Question 3

Why do losses offset short-term gains first?

Accepted Answer

The IRS requires that short-term losses first offset short-term gains, and long-term losses first offset long-term gains. After netting within each category, any remaining net loss offsets gains in the other category. This ordering maximizes your tax savings because short-term gains are taxed at your ordinary income rate (up to 37%), which is typically higher than the preferential long-term capital gains rate (0%, 15%, or 20%).

Question 4

How much can I deduct against ordinary income?

Accepted Answer

If your capital losses exceed your capital gains, you can deduct up to $3,000 per year ($1,500 if married filing separately) of net capital losses against ordinary income. Any remaining losses carry forward to future years indefinitely and continue to offset gains and up to $3,000 of ordinary income each year until fully used.

Question 5

When should I harvest tax losses?

Accepted Answer

The best time to harvest losses is typically toward the end of the tax year when you can see your full picture of realized gains. However, losses can be harvested any time an investment is down — you don't have to wait until year-end. Market downturns present excellent harvesting opportunities. Just be mindful of the wash sale rule's 30-day window when reinvesting.

Metric	Without Harvesting	With Harvesting	Savings
Total Capital Gains Tax	$8,933	$5,950	$2,983
Effective Tax Rate	5.96%	3.97%	1.99%
Short-Term Gains Offset	$0	$10,000	$10,000
Long-Term Gains Offset	$0	$5,000	$5,000
Ordinary Income Offset ($3K max)	$0	$0	$0
Loss Carryforward to Next Year	--	$0	--

Tax-Loss Harvesting Calculator (2025)

Without Harvesting

With Harvesting

Loss Allocation Breakdown

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