Tax-Loss Harvesting: The Complete Guide (Including What It’s Actually Worth)
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Every brokerage now advertises tax-loss harvesting like a yield. It’s a real strategy with real value — and a more modest one than the marketing implies. Here’s the whole picture.
The mechanics
Sell a position below your basis and the realized loss goes to work in strict order: first against capital gains (short-term losses against short-term gains — the ones taxed like wages — then long against long, then across), next against up to $3,000 of ordinary income per year, with anything left carrying forward indefinitely.
The classic execution: sell the loser, immediately buy something similar but not substantially identical — one broad-market fund for another tracking a different index — so you capture the loss without leaving the market. Thirty-one days later you can return to the original if you care to.
The wash sale rule, which sees everything
Buy the same or substantially identical security within 30 days before or after the loss sale and the loss is disallowed — deferred into the replacement’s basis. Three versions people miss:
All accounts count: your IRA, your other brokerage, your spouse’s accounts. A loss harvested in taxable while your 401(k)’s dividend reinvestment buys the same fund inside the window — washed. (And a wash into an IRA destroys the loss permanently.)
Automatic reinvestments are the top accidental trigger. Turn off DRIP in taxable accounts you harvest from.
Crypto currently sits outside the wash sale rule — a legitimate asymmetry, harvestable and immediately repurchasable, for as long as Congress leaves it open.
What it’s actually worth — the honest part
Harvesting mostly defers tax rather than erasing it: the replacement carries a lower basis, so you’ve moved gain into the future. The real value comes from four places: the time value of the deferral, the rate arbitrage (deduct against short-term gains or ordinary income now, repay at long-term rates later), the $3,000 annual ordinary-income trickle, and the two true escape hatches — appreciated shares donated to charity or held until death (stepped-up basis) mean the deferred gain never comes due at all.
Reasonable estimates put the long-run benefit in the range of a few tenths of a percent of portfolio value per year — worthwhile, compounding, and not the free lunch it’s sold as.
Doing it well
Harvest opportunistically all year — volatility in June counts the same as December’s.
Keep an approved “pairs list” of replacement funds decided in advance.
Mind the qualified dividend holding periods and fund distribution dates around trades.
Never let the tax tail wag the portfolio: the investment policy comes first, the harvest is a bonus.
High earners with large embedded gains, charitable intent, or NIIT exposure get the most; retirees in the 0% capital gains bracket should often do the opposite — gain harvesting, resetting basis upward tax-free.
That last point is the tell of real planning: knowing which bracket you’re in decides whether losses or gains are the thing to harvest this year.
Romanchuk CPA LLC is a fully virtual CPA firm serving individuals and business owners nationwide since 2014, with NJ/NY depth. Book a consultation at rfg.tax.
This article is general information, not tax advice for your specific situation. Figures adjust annually — verify current amounts.