Tax-loss harvesting is selling investments at a loss to offset capital gains and reduce a client's tax bill.
Tax-Loss Harvesting
Tax-loss harvesting is selling investments at a loss to offset capital gains and reduce a client's tax bill.
Tax-loss harvesting is selling investments at a loss to offset capital gains and reduce a client's tax bill. The realized loss offsets realized gains elsewhere in the portfolio, and a limited amount can offset ordinary income, with the rest carried forward.
Advisors use it to improve after-tax returns without changing a client's overall market exposure — you sell a losing position and buy a similar (but not "substantially identical") one to stay invested. Getting the replacement wrong triggers the IRS wash-sale rule, which disallows the loss.
Because harvesting opportunities appear and vanish with daily prices, it is hard to do well manually across many accounts. Investment management software scans for losses continuously, respects wash-sale windows, and pairs each sale with a suitable replacement security.
Advisors weigh a few factors before harvesting:
- Wash-sale compliance across all of a household's accounts
- Short- vs. long-term character of the gain being offset
- Tracking error introduced by the replacement holding
The technique pairs naturally with direct indexing.