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Tax-loss harvesting is an investment and tax-reduction strategy that can help reduce your tax bill at the end of the year. But tax-loss harvesting can be complicated, and its potential tax benefits may not outweigh the downsides.
What is tax-loss harvesting?
Tax-loss harvesting is the deliberate selling of securities at a loss to offset capital gains, and it can also help you lower your taxable income by as much as $3,000 each year.
How does tax-loss harvesting work?
Tax-loss harvesting works by using the losses on your investments to offset capital gains. Long-term capital losses are first used to offset long-term gains, while short-term losses are first deducted against short-term gains. After that, excess losses can be used to offset the other kind of gain. If there are no gains, you can use excess losses to reduce regular income.
IRS rules allow individuals to claim up to $3,000 ($1,500 if married filing separately) in deductible capital losses each year. You can carry any loss over this limit forward to later years too.
Example
Say you sell an investment you purchased for $1,000 for $3,000, giving you a realized capital gain of $2,000. This $2,000 gain is taxable in the year you sold the stock and took the profit. Now say you have another stock you bought for $5,000 that is now worth $2,000.
You can deliberately sell that losing investment, harvest the loss to offset that $2,000 gain and apply the excess $1,000 to reduce your taxable income when taxes are due.
6 tax-loss harvesting rules and considerations
You can claim up to $3,000 in annual tax breaks if your capital losses exceed your capital gains.
This strategy is only useful for taxable accounts — the IRS does not tax growth on investment earnings in retirement accounts.
You have up until December 31 to wrap up the tax-loss selling process.
You can carry losses above the $3,000 limit into future years.
The wash-sale rule prohibits an investor from claiming a loss on the sale of an investment and then buying a “substantially identical” security within 30 days before or after the sale. So you need to be strategic with how you redeploy those funds.
While anyone can harvest losses, the strategy is most impactful for those in high tax brackets. The higher your tax bracket, the higher your tax rate. And the more impactful tax-loss harvesting becomes.
Advantages and disadvantages of tax-loss harvesting
Tax-loss harvesting allows individuals to reduce taxes owed by offsetting realized capital gains with realized capital losses. Even if you don’t have capital gains, you can still use the losses to reduce your regular taxable income.
But offloading all your losing investments for tax purposes may not benefit your investment portfolio — at least not in the long run. Investing is a long-term game, and unless there is something fundamentally wrong with the asset, holding an investment you believe in may be more valuable than the tax deduction you can get today.
What’s more, tossing out securities that have experienced a drop in value could throw off your portfolio’s overall asset allocation and diversification. And with the wash-sale rule in place, you need to be careful with how you reinvest proceeds.
Wash-sale rule
The IRS designed the wash-sale rule to prevent investors from abusing tax-loss harvesting to reduce their tax liability. The rule stipulates that you can’t claim a loss on an investment if you purchase the same or a “substantially identical” security within 30 days before or after the sale.
One common way to avoid the wash-sale rule if you sell an individual stock that has incurred losses is to replace it with an exchange-traded fund (ETF) or mutual fund that provides exposure to the same industry or asset class. The extent of the overlap of the new security with the original investment is what the IRS looks at when determining if the wash-sale rule applies.
Even well-meaning investors unintentionally break the wash-sale rule, though. That said, breaking it won’t result in a fine or penalty — it only means you can’t recognize the loss for tax purposes.
Like tax-loss harvesting, the wash-sale rule can be tricky to navigate, which is why tax-loss harvesting is often best left to the experts.
Is tax-loss harvesting worth it?
Tax-loss harvesting can be an effective strategy, as it lets you reduce taxes owed at the end of the year. These tax savings can be significant, especially in a high tax bracket. And if you’re already rebalancing your portfolio because your investment strategy has changed, it could be a great time to employ tax-loss harvesting for the securities you sell.
But the strategy may not always make sense. Depending on your income and tax bracket, tax-loss harvesting may not be worthwhile.
For example, if you make less than $41,675 annually — or $83,350 if married filing jointly — harvesting long-term losses may not be worth it since there’s no tax due on long-term capital gains if your taxable income is less than or equal to $41,675. If you’re in a zero tax bracket, selling capital gains may actually be the better choice.
When your portfolio is larger, tax-loss harvesting becomes more important in terms of relative impact. Gains on larger portfolios are likely to create a higher tax liability for you — not only because of their size, but because that size may push you into a higher tax bracket.
Should you attempt tax-loss harvesting on your own?
Tax-loss harvesting is more complex than simply selling losers to offset taxable gains from winners. It’s a strategy that may not be suitable for beginners. Even experienced investors can get it wrong.
Finder asked over 20 investment experts whether investors should attempt to perform tax-loss harvesting on their own. The almost-unanimous answer was:
No: because understanding the strategy’s value isn’t the same as effectively executing it.
Tax-loss harvesting is nuanced and requires active monitoring of timelines if you want to switch back into the original positions as quickly as possible.
One nuance is understanding the distinction between short-term and long-term capital gains when determining how to deduct capital losses, as one can be more valuable depending on your personal tax situation.
Short-term capital gains are gains from investments bought and sold over one year or less. These gains are taxed at your regular income tax rate. Harvesting losses to offset short-term gains may be more valuable since short-term gains are taxed at a higher rate.
Long-term capital gains apply to investments held for over one year. And the tax brackets for these gains sit at 0%, 15% or 20%, depending on your annual income.
Choosing which losses to claim while maintaining portfolio diversification and avoiding trouble with the wash-sale rule is a delicate balancing act. And beginners are likely best off relying on a financial professional or service that can perform tax-loss harvesting for them.
4 robo-advisors that offer tax-loss harvesting
Tax-loss harvesting is best performed by a financial professional. That said, an increasing number of automated services like robo-advisors are offering customers a tax-loss harvesting feature as part of their auto-rebalancing calculations. The following robo-advisors each offer their own version of automated tax-loss harvesting:
Frec's a low-cost direct indexing platform, offering 16 direct indexing strategies with exposure to large-cap, mid-cap and small-cap US company stocks and the ability to exclude specific stocks or sectors. Frec then steps in with automatic tax-loss harvesting, automatic portfolio rebalancing and automatic dividend reinvestment. All for as little as 0.09% in annual advisory fees and a $20,000 minimum investment, both of which are significantly lower than most competing direct indexing platforms. Frec also offers individual stock and ETF trading and a Treasury account to earn a higher yield on your cash.
Stock trade fee
$0
Minimum deposit
$20,000
Signup bonus
N/A
Frec's a low-cost direct indexing platform, offering 16 direct indexing strategies with exposure to large-cap, mid-cap and small-cap US company stocks and the ability to exclude specific stocks or sectors. Frec then steps in with automatic tax-loss harvesting, automatic portfolio rebalancing and automatic dividend reinvestment. All for as little as 0.09% in annual advisory fees and a $20,000 minimum investment, both of which are significantly lower than most competing direct indexing platforms. Frec also offers individual stock and ETF trading and a Treasury account to earn a higher yield on your cash.
Robinhood Strategies offers managed portfolio with human oversight for a $50 minimum and 0.25% annually. Portfolios include a mix of stocks and ETFs, with automatic rebalancing, the ability to toggle any stock on or off and Monte Carlo simulations to model your earnings potential. Robinhood Strategies implements tax-aware investing by prioritizing selling securities with losses first.
Stock trade fee
$0
Minimum deposit
$50
Signup bonus
Get your first $500 deposited management-fee-free
Robinhood Strategies offers managed portfolio with human oversight for a $50 minimum and 0.25% annually. Portfolios include a mix of stocks and ETFs, with automatic rebalancing, the ability to toggle any stock on or off and Monte Carlo simulations to model your earnings potential. Robinhood Strategies implements tax-aware investing by prioritizing selling securities with losses first.
Betterment introduced the world to robo-advisors when it first launched onto the scene in 2010 with its automated portfolios of stocks and bonds, and it's been at the top of the robo-advisory service pack ever since. Today, Betterment's refined automated investing platform a high-yield cash account and access to a human advisor, which has helped it rack up over 800,000 customers and more than $40 billion in assets under management. It's also one of the only crypto robo-advisors we review. Invest in curated selections of cryptocurrencies, including bitcoin, Ethereum and more, with direct ownership
Stock trade fee
$0
Minimum deposit
$10
Signup bonus
N/A
Betterment introduced the world to robo-advisors when it first launched onto the scene in 2010 with its automated portfolios of stocks and bonds, and it's been at the top of the robo-advisory service pack ever since. Today, Betterment's refined automated investing platform a high-yield cash account and access to a human advisor, which has helped it rack up over 800,000 customers and more than $40 billion in assets under management. It's also one of the only crypto robo-advisors we review. Invest in curated selections of cryptocurrencies, including bitcoin, Ethereum and more, with direct ownership
Pros
Wide range of account options
Automatic portfolio rebalancing
Automatic dividend reinvestments
Tax-loss harvesting
Automated crypto investing with direct ownership
Cons
0.25% annual management fee
$100,000 minimum balance to access its premium service tier and personalized financial planning
Available asset types
ETFs, High-yield cash account
Annual fee
0.25% on balances up to $99,999 0.4% on balances of $100,000+
This well-equipped robo-advisor is outfitted with everything you need to set it and forget it with peace of mind: automated index investing across 17 global asset classes, including crypto, automatic portfolio rebalancing and tax-loss harvesting, all across a range of account types. In fact, Wealthfront is one of the only robo-advisors we review that offers automated college savings accounts. Wealthfront offers more than 240 ETFs for its investing accounts and a separate account with access to trade individual stocks commission-free and for as little as $1 should you want more control.
Stock trade fee
$0
Minimum deposit
$500
Signup bonus
Get $50
This well-equipped robo-advisor is outfitted with everything you need to set it and forget it with peace of mind: automated index investing across 17 global asset classes, including crypto, automatic portfolio rebalancing and tax-loss harvesting, all across a range of account types. In fact, Wealthfront is one of the only robo-advisors we review that offers automated college savings accounts. Wealthfront offers more than 240 ETFs for its investing accounts and a separate account with access to trade individual stocks commission-free and for as little as $1 should you want more control.
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Bottom line
Tax-loss harvesting is a strategy that can help lower capital gains tax and reduce taxable income, but its many moving parts are likely unsuitable for beginners. Before implementing this loss harvesting strategy on your own, consider consulting a tax professional for financial advice specific to your tax situation and financial goals.
If you’re keen to take advantage of this strategy, explore your robo-advisor account options. These investment services can automate the process to ensure you get the most out of your portfolio.
Frequently asked questions about tax-loss harvesting
Is tax-loss harvesting worth it?
Tax-loss harvesting may be worth it if you are in a high-income tax bracket and want to lower your tax burden.
Can you tax-loss harvest in an IRA?
Buying and selling securities within an IRA is not a taxable event. As a result, there is no benefit from tax-loss-harvesting within an IRA.
One downside to tax-loss harvesting is the opportunity cost of selling a down investment for tax purposes and missing out on potential gains if the investment rebounded.
How much can you claim in tax-loss harvesting?
The IRS lets individuals claim up to $3,000 in excess capital losses each year to lower their regular income.
What are the tax advantages to tax-loss harvesting?
The tax advantages of tax-loss harvesting include the ability to offset capital gains with capital losses and use excess losses to reduce regular taxable income.
Can you tax-loss harvest crypto?
Cryptocurrency is subject to the same tax treatment as other capital gains and losses, which means you can tax-loss harvest crypto losses just as you can with stocks.
Matt Miczulski is an investments editor at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University. See full bio
Matt's expertise
Matt has written 194 Finder guides across topics including:
A deep dive into the highlights and limitations of Robinhood.
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