Tax-Loss Harvesting, Explained Simply

Tax-loss harvesting is selling an investment that has dropped in value on purpose, so you can use that loss to lower your tax bill.

It sounds backwards to sell a loser on purpose, but stick with me. When you sell an investment for less than you paid, you lock in a capital loss. The government lets you use those losses to cancel out capital gains from your winners. Less taxable gain means a smaller tax bill.

Why it matters is that the loss does not just vanish. If your losses are bigger than your gains in a year, you can use up to $3,000 of the extra to reduce your regular income, and anything left over carries forward to future years. So a bad year in the market can quietly become a tax break.

Here is a real-dollar example. Say one fund gained you $4,000 this year, but another one dropped and you are down $4,000 on it. If you sell the loser, that $4,000 loss cancels the $4,000 gain, and you owe nothing on either. Without harvesting, you might have owed around $600 on that gain at the 15 percent rate.

One catch to know. The wash-sale rule says if you buy the same or a nearly identical investment within 30 days before or after the sale, the IRS disallows the loss. So you cannot sell it Monday and rebuy it Tuesday to game the system.

Bottom line: Harvesting a loss turns a market dip into a tax discount, as long as you respect the 30-day wash-sale rule.

This is general education, not personal advice, so check with a licensed professional about your situation.

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