Tax-Loss Harvesting
Tax-loss harvesting is a strategy of selling investments at a loss to offset capital gains or ordinary income, thereby reducing tax liability while maintaining market exposure by purchasing similar (but not substantially identical) investments.
Exam Tip
Wash sale = 30 days before OR after. Applies to substantially identical securities AND across all accounts including spouse.
What is Tax-Loss Harvesting?
Tax-loss harvesting is selling securities at a loss to realize a capital loss. This loss can offset capital gains and up to $3,000 of ordinary income annually.
Tax Benefits
| Benefit Type | Rule |
|---|---|
| Offset Gains | Unlimited |
| Offset Ordinary Income | $3,000/year |
| Carryforward | Unlimited years |
The Wash Sale Rule
The IRS wash sale rule prevents claiming a loss if you buy a "substantially identical" security within 30 days before or after the sale.
61-Day Window:
- 30 days before the sale
- Date of sale
- 30 days after the sale
Wash Sale Consequences
If triggered, the loss is added to the cost basis of replacement shares - not permanently lost.
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