Tax-Loss Harvesting

Tax-loss harvesting is one of those rare strategies that feels like a loophole (but isn't). You sell an investment that's dropped in value to realize a capital loss. That loss offsets gains from your winners, and if your losses outpace your gains, you can knock up to $3,000 off your ordinary income too.

The trick is staying invested. After selling the loser, you immediately buy something similar—but not "substantially identical"—to keep your market exposure. For example, sell one S&P 500 index fund at a loss and buy a different fund that also tracks the S&P 500.

The main rule to watch is the wash sale rule: you can't buy the same or substantially identical security within 30 days before or after the loss sale. This is pretty clear-cut for individual stocks but gets murkier with mutual funds and ETFs tracking similar indexes.

Harvesting is most valuable when you have big gains to offset—maybe you sold a concentrated stock position or rebalanced your portfolio. It's also a sweet spot for crypto investors, since under current rules the wash sale rule doesn't explicitly apply to crypto (though that could change).

One thing to keep in mind: harvesting doesn't erase the tax—it defers it by lowering the cost basis of your replacement investment. But deferral has real value because you get to invest the tax savings now and let them compound. For high-income investors, systematic harvesting throughout the year can add up to meaningful savings.