Tax-Loss Harvesting: Turning Market Dips Into Tax Savings

When you sell an investment in a taxable account at a price lower than what you paid, you realize a capital loss. That loss can offset capital gains realized elsewhere. If you have more losses than gains, you can use up to $3,000 of excess losses to offset ordinary income per year. Anything beyond that carries forward indefinitely.

Jordan's taxable account has grown to $340,000. In a 10% down year, his unrealized losses could be $30,000+. If he also had a home sale generating $25,000 in capital gains, harvesting those losses would eliminate the tax on the entire gain - saving $3,750-$6,000 depending on his bracket.

• Long-term capital gains (held 12+ months): 0%, 15%, or 20% depending on income
• Short-term capital gains (held 12 months or less): taxed as ordinary income

The bottom line

The most tax-efficient harvest pairs short-term losses against short-term gains first, since the savings per dollar of offset are higher.

You're not selling a position at a loss on purpose - the loss already exists. The harvest converts a paper loss into a tax-recognized loss. It doesn't apply inside tax-advantaged accounts. And it's not worth manufacturing trades just to create losses if you don't have meaningful offsetting gains.