Tax-loss harvesting offsets $3K yearly
- Internal Revenue Service rules let investors use net capital losses to offset capital gains first, then deduct up to $3,000 against ordinary income each year. - The wash-sale rule blocks that deduction if an investor buys substantially identical securities within 30 days before or after the loss sale. - Unused losses can carry forward indefinitely, extending the tax benefit across future years. (irs.gov)
Tax-loss harvesting is the practice of selling an investment below its purchase price so the loss can reduce taxes in a taxable brokerage account. (irs.gov) (schwab.com) Under Internal Revenue Service rules, capital losses first offset capital gains. If losses are still larger, an individual can deduct up to $3,000 a year against ordinary income, or $1,500 if married filing separately. (irs.gov) Any net loss above that limit does not disappear. The Internal Revenue Service says unused capital losses carry forward to later tax years until they are used. (irs.gov) The main trap is the wash-sale rule. A loss is disallowed if the investor buys the same or a substantially identical security within 30 days before or 30 days after the sale. (investor.gov) (law.cornell.edu) That makes the window effectively 61 days when the sale date is included. The rule also covers contracts or options to buy substantially identical securities. (investor.gov) (law.cornell.edu) A disallowed wash-sale loss is usually added to the cost basis of the replacement shares instead of being deducted immediately. That can postpone, rather than erase, the tax benefit. (irs.gov) (law.cornell.edu) The strategy is usually discussed late in the calendar year, when investors know more about realized gains and losses. It applies to taxable accounts, not tax-deferred retirement accounts where gains and losses are generally not currently taxed. (irs.gov) (schwab.com) Investors who want to stay invested often swap into a similar, but not substantially identical, holding after selling at a loss. The exact line is facts-and-circumstances based, so broker records and tax reporting matter. (irs.gov) (schwab.com) The basic math is simple, but the paperwork is not. The benefit comes from netting gains and losses correctly, avoiding wash sales, and carrying forward any unused loss to future returns. (irs.gov 1) (irs.gov 2)
