Tax loss harvesting: the silver lining in market volatility

Tax loss harvesting is selling an investment that has dropped below what you paid for it to realize a loss, which can offset capital gains and a limited amount of ordinary income. You then reinvest in a similar holding to stay invested, turning a market decline into a potential tax benefit without abandoning your strategy.

Finding opportunity in a down market

When markets fall, the instinct is to feel only the stress of it. That is understandable. But a decline can also open a planning opportunity that quietly works in your favor, and tax loss harvesting is one of the clearest examples.

The idea is not to celebrate a downturn. It is to make sure that if your investments have dropped, you are at least capturing a benefit the tax code allows along the way.

How tax loss harvesting works

If an investment in a taxable account is worth less than what you paid, you can sell it to realize a capital loss. That loss can offset capital gains elsewhere in your plan, and if your losses exceed your gains, you can apply a limited amount against ordinary income, with the remainder carried forward to future years.

Crucially, you do not have to leave the market. You can reinvest the proceeds into a similar but not identical investment, so your overall strategy stays intact while you capture the loss.

• The strategy applies to taxable brokerage accounts, not tax-deferred accounts like IRAs.
• Realized losses offset realized gains, then a limited amount of ordinary income.
• Unused losses can carry forward to offset gains in later years.
• The wash sale rule prevents claiming the loss if you rebuy a substantially identical investment too soon.

Where it fits in your plan

Tax loss harvesting is most useful when it is coordinated with the rest of your tax picture, including gains you plan to realize and your income for the year. Because the rules have real traps, like the wash sale rule, it is worth talking through the specifics with an advisor before acting.

Frequently asked questions

What is tax loss harvesting?

It is the practice of selling an investment that has fallen below its purchase price to realize a capital loss. That loss can offset capital gains and a limited amount of ordinary income, while you reinvest in a similar holding to stay in the market.

What is the wash sale rule?

The wash sale rule disallows the tax loss if you buy a substantially identical investment within 30 days before or after the sale. To preserve the benefit, you reinvest in a similar but not identical holding instead.

Does tax loss harvesting work in an IRA?

No. The strategy applies to taxable brokerage accounts, because gains and losses inside tax-deferred accounts like IRAs are not taxed when investments are sold within the account.