Using losses to reduce taxable income
Tax-loss harvesting involves selling securities at a loss to offset capital gains from other investments or, if losses exceed gains, to deduct up to $3,000 of ordinary income per year. Excess losses carry forward indefinitely to future years.
For example, if you realized $8,000 in gains and harvested $10,000 in losses, you can offset all gains and deduct $3,000 of ordinary income, with the remaining $3,000 carrying forward.
Wash-sale rules and practical implementation
The wash-sale rule prevents repurchasing a substantially identical security within 30 days before or after the loss sale. This locks in the tax benefit but doesn't prevent staying invested: buying a similar fund or sector ETF satisfies the rule while maintaining market exposure.
Tax-loss harvesting is most valuable for taxable investment accounts with volatile positions. It works best when there are other gains to harvest against or when high earners can absorb the $3,000 ordinary income deduction.