Tax-loss harvesting
The mostly-free IRS discount for people who invest in taxable accounts.
If you have investments in a taxable brokerage account, tax-loss harvesting is an advanced but legal strategy where you realize paper losses on purpose to offset future taxes, without meaningfully changing your investment exposure.
How it works
Say you bought $10,000 of a total stock market ETF. It drops to $8,500. You sell it, realizing a $1,500 capital loss. You immediately buy $8,500 of a similar but not 'substantially identical' fund — say, a different provider's total stock ETF tracking a slightly different index. You still own roughly the same market exposure; your risk and return look nearly identical. But now you have a $1,500 loss on your tax return.
What you do with the loss
- Offsets capital gains dollar-for-dollar in the current year.
- Up to $3,000 of excess losses can offset ordinary income (wages, interest) each year.
- Any remaining loss carries forward indefinitely for future years.
When to do it
Only matters in taxable brokerage accounts (not IRAs or 401ks — they're already tax-advantaged). Most useful during market drawdowns, when losses exist to harvest. Some brokerages (Wealthfront, Betterment, Fidelity) do this automatically.
Put this into practice
Worth tracks your accounts, budgets, and goals — so the concepts in this article aren't just theory.
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