Tax-Loss Harvesting
Turn investment losses into tax savings
Strategic Tax Optimization
Tax-loss harvesting lets you legally reduce your tax bill by offsetting capital gains with investment losses. Learn advanced strategies while avoiding common pitfalls.
Tax-Loss Harvesting Calculator
• Gains tax savings: $1,200 (at 15% rate)
• Ordinary income savings: $0 (at 22% rate)
• Total immediate savings: $1,200
Tax-Loss Harvesting Strategies
Direct Offset Strategy
Sell losing positions to directly offset realized capital gains in the same tax year
Implementation Steps
- 1.Identify realized capital gains for the year
- 2.Review portfolio for unrealized losses
- 3.Sell losing positions up to gain amount
- 4.Reinvest in similar (not identical) assets
Key Considerations
- Must avoid wash sale rule (30-day period)
- Consider transaction costs
- Maintain desired asset allocation
- Best for significant realized gains
Loss Banking Strategy
Realize losses even without current gains to carry forward and offset future gains
Implementation Steps
- 1.Identify underperforming positions
- 2.Realize losses up to $3,000 annually
- 3.Carry forward excess losses
- 4.Use losses against future gains
Key Considerations
- Can deduct $3,000 annually against ordinary income
- Unlimited carryforward period
- May miss potential recovery
- Opportunity cost of early selling
Paired Trading Strategy
Simultaneously harvest losses while maintaining market exposure through similar investments
Implementation Steps
- 1.Identify losing position to harvest
- 2.Research substantially different but similar asset
- 3.Sell losing position
- 4.Immediately buy similar asset
- 5.Wait 31 days before repurchasing original
Key Considerations
- Requires knowledge of substantially different securities
- Higher transaction costs
- Tracking wash sale compliance
- Market exposure maintained
Factor Rotation Strategy
Harvest losses while rotating between different investment factors or styles
Implementation Steps
- 1.Monitor factor performance differences
- 2.Identify losses in underperforming factors
- 3.Rotate to outperforming factors
- 4.Maintain overall portfolio balance
- 5.Rebalance according to long-term strategy
Key Considerations
- Requires sophisticated factor analysis
- Higher portfolio turnover
- Style drift risks
- May conflict with long-term allocation
Essential Tax Rules & Compliance
Wash Sale Rule
Cannot deduct losses if you buy substantially identical security within 30 days before or after sale
61-day window (30 days before + 30 days after)
Loss deduction disallowed and added to cost basis of new purchase
How to Avoid Violations
- Wait 31 days before repurchasing
- Buy similar but not identical securities
- Use spouse's account carefully (applies to spouses too)
- Avoid buying in IRA or 401(k) during period
Common Examples
- Selling Apple stock and buying Apple stock again within 30 days
- Selling S&P 500 ETF and buying another S&P 500 ETF
- Selling individual stock and buying call options on same stock
Loss Limitation Rules
Capital losses can only offset capital gains plus $3,000 of ordinary income annually
Annual limitation with carryforward
Excess losses must be carried forward to future years
How to Avoid Violations
- Plan loss realization around gain realization
- Consider timing of gains and losses
- Track carryforward losses accurately
- Optimize between short-term and long-term
Common Examples
- $10,000 loss can offset $7,000 gains + $3,000 ordinary income
- Remaining losses carry forward indefinitely
- Short-term losses offset short-term gains first
Constructive Sale Rules
Certain transactions that eliminate risk may trigger constructive sale treatment
Immediate effect when transaction occurs
Gain recognition even without actual sale
How to Avoid Violations
- Avoid short sales against appreciated positions
- Be careful with collar strategies
- Understand forward contract implications
- Consult professionals for complex strategies
Common Examples
- Short selling stock you own
- Buying put options while owning stock
- Entering forward sale contracts
Net Investment Income Tax
Additional 3.8% tax on investment income for high-income taxpayers
Applies to tax year when income thresholds exceeded
Additional 3.8% tax on net investment income
How to Avoid Violations
- Consider NIIT in tax planning calculations
- May affect optimal gain/loss timing
- Evaluate strategies to reduce modified AGI
- Professional planning for high-income situations
Common Examples
- Singles with MAGI over $200,000
- Married filing jointly over $250,000
- Applies to capital gains, dividends, interest
Common Tax-Loss Harvesting Scenarios
Perfect Offset
Full offset of capital gains with harvested losses
$10,000 × 22% = $2,200
Partial Offset + Ordinary Income
Offset gains plus deduct $3,000 against ordinary income
$5,000 × 15% + $3,000 × 22% = $1,410
Loss Banking
No current gains, bank losses for future use
$3,000 × 22% = $660 (plus $2,000 carryforward)
Excess Losses
Large losses requiring multi-year carryforward strategy
$5,000 × 15% + $3,000 × 22% = $1,410 (plus $12,000 carryforward)
Frequently Asked Questions
Important Disclaimer
Tax and Investment Advice: This calculator and guide are for educational purposes only and should not be considered personalized tax or investment advice. Tax laws are complex and change frequently. Tax-loss harvesting strategies may not be suitable for all investors.
Professional Consultation: Always consult with a qualified tax professional, financial advisor, or certified public accountant before implementing tax-loss harvesting strategies. Individual circumstances vary significantly and may affect the appropriateness and effectiveness of these strategies.
Calculation Accuracy: While we strive for accuracy, this calculator makes simplified assumptions and may not account for all factors affecting your specific tax situation, including state taxes, AMT, net investment income tax, or complex securities.
Market Risks: Tax-loss harvesting involves selling investments that may recover in value. Consider your overall investment strategy and risk tolerance. Past performance does not guarantee future results.
No Warranty: Warren AI provides this information "as is" without warranty of any kind. We are not responsible for any losses or damages resulting from the use of this information or calculator.
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