Tax loss harvesting is a strategy that lets investors sell losing stocks or funds on purpose, then use those losses to offset gains elsewhere or trim their taxable income by as much as $3,000 a year. It works only in taxable brokerage accounts, and it comes with one major rule investors need to respect: the wash sale rule.
Why This Strategy Matters Right Now
Markets have swung hard this year, and that kind of volatility is exactly when tax loss harvesting tends to pay off. Filip Telibasa, a certified financial planner and owner of Benzina Wealth, says a choppy market creates more chances to lock in short term losses. Selling an investment for less than you paid, on paper, and then applying that loss against your tax bill is the basic mechanic. Losses can offset capital gains from other sales, and if losses exceed gains, up to $3,000 of the excess can reduce ordinary income for the year.
There is a secondary benefit too. Telibasa points out that portfolios drift out of balance as individual holdings rise and fall at different rates. Selling a position that has dropped in value is one way to nudge a portfolio back toward its intended mix, while also generating a usable tax loss in the process.
Losses do not have to be used up in a single tax year. Alvin Carlos, a certified financial planner and founder of District Capital Management, explains that any loss left over after offsetting gains and the $3,000 income deduction simply carries forward to future years. That means a bad year in the market can end up softening tax bills for years afterward, not just the current one.
30 Days Is the Number That Trips People Up
The IRS wash sale rule is the biggest trap in this whole strategy. Sell a security at a loss, then buy something the IRS considers