A Practical Tax-Loss Harvesting Playbook

Tax-loss harvesting (TLH) is one of the highest-leverage strategies in taxable investing — converting paper losses into real tax savings. The technique is simple; execution details matter.

When to harvest

• Any holding in a taxable account trading below cost basis.
• During market drawdowns (the bigger the loss, the bigger the benefit).
• Before year-end to apply against current-year gains.

The 30-day wash sale window

To preserve the loss for tax purposes, you must avoid buying back the same or "substantially identical" security within 30 days before or after the sale. The window applies across all accounts you control — including your spouse's and IRAs.

Standard swap pairs

Annual limits and carryforwards

• Capital losses first offset capital gains (no limit).
• Excess losses offset up to $3,000 of ordinary income per year.
• Remaining losses carry forward indefinitely.

A worked example: a $50,000 harvest in 2022

An investor held $400,000 of VTI (Total US Stock) in a taxable account. In June 2022, VTI was down about 20% from the year's peak — a paper loss of roughly $80,000. They sold $250,000 of their highest-cost-basis lots, realizing $50,000 in losses. They immediately bought $250,000 of ITOT (a different total-market ETF tracking a different index, so not "substantially identical").

Result: same market exposure, but $50,000 of losses now available to offset future gains. At a 24% federal marginal rate plus 9% California state, they expect to save roughly $16,500 in taxes when they eventually sell other winners. The trade took 20 minutes.

Why TLH compounds harder than people realize

A $3,000 loss claimed against ordinary income at a 32% marginal rate saves $960 in current-year taxes. Reinvest that $960 at 7% real for 30 years and it becomes $7,300. Multiply across multiple harvest events over a 30-year accumulation window and the cumulative value of consistent TLH is often $50,000–$100,000 for a moderately-sized taxable account.

The wash-sale rule in plain English

• The window is 61 days: 30 days before, the sale date, and 30 days after.
• It applies across all accounts you control — including your IRA and your spouse's accounts.
• Buying "substantially identical" securities triggers it. The IRS has never defined this precisely, but practitioners avoid swapping two S&P 500 index funds.
• Dividend reinvestment can accidentally trigger wash sales. Disable DRIP on assets you're actively harvesting.
• A disallowed loss isn't lost — it adds to the cost basis of the new shares. You eventually get the loss when those shares are sold.

Standard tax-loss swap pairs

Common TLH mistakes

• Harvesting in tax-advantaged accounts. No tax consequence inside an IRA, so no benefit. Only taxable accounts.
• Forgetting the spouse rule. If your spouse buys VTI in their IRA within 30 days of your VTI loss sale, the loss is disallowed.
• Auto-reinvesting dividends. A $30 dividend reinvestment can wash out a $30,000 loss harvest. Turn off DRIP on harvest candidates.
• Harvesting at small loss sizes. The transaction cost (your time, possible bid-ask) often isn't worth it under $1,000 of loss.
• Swapping back too soon. Wait at least 31 calendar days, ideally 35 for safety.

Annual limits and carryforwards

Capital losses offset capital gains dollar-for-dollar with no limit. Net losses beyond gains offset up to $3,000 of ordinary income per year ($1,500 if married filing separately). Excess carries forward indefinitely to future tax years. Many TLH-aggressive investors carry six-figure loss carryforwards that they slowly draw down against future gains.

Frequently asked questions

Does TLH actually save tax — or just defer it?

Both. In the short term it defers. But if you eventually realize gains at a lower rate (e.g., in retirement at 0% LTCG), or never realize them at all (step-up in basis at death), the deferral becomes permanent savings. Most retail investors significantly underestimate this.

What if I plan to leave assets to heirs?

Even better — TLH the losses now, and your heirs get a stepped-up cost basis at your death, erasing the embedded gains entirely. The harvested losses already saved you tax during life.

Can I do this manually or do I need software?

Below ~$200,000 in taxable, you can do it manually two or three times a year. Above that, Wealthfront/Betterton/Frec automate it for ~25 bps. The cost-effectiveness flips around $400k–$1M depending on volatility.

Does TLH help if I'm in a 0% capital gains bracket?

Less useful. If you're already paying no tax on long-term gains, harvesting losses doesn't save anything against gains — but the $3,000/year ordinary-income offset still applies.

Putting this into practice this week

The hardest part isn't understanding the concept — it's making one small change before you forget. Pick the single most relevant action below and put it on your calendar. Future you will thank present you for choosing one thing and doing it, instead of nothing while planning everything.

• Open a high-yield savings account if you don't have one. Twenty minutes.
• Increase your 401(k) contribution by 1 percentage point. Five minutes.
• Sign up for the Krovea Sunday letter and bookmark this article.
• Walk through the relevant Krovea calculator with your actual numbers.

Key takeaways for your action plan

• Start now, not when the market "feels right." The optimal entry point is unknowable in advance.
• Automate the decision so behavior is removed from the equation.
• Match your strategy to your time horizon, not to recent headlines.
• Tax-advantaged accounts come first; taxable strategies are the finishing touches.
• Review your plan annually, ignore it the other 364 days.

The bottom line

Tax-loss harvesting is one of the few legal "free" returns available to a long-term taxable investor. Done badly it produces wash sales and nothing else. Done thoughtfully — once or twice a year, in volatile periods, with proper swap pairs — it adds 0.3–0.6% to after-tax returns. Over a 30-year window, that's the difference between retiring with $2M and retiring with $2.4M.