What is Capital Loss Harvesting?

Capital loss harvesting is a tax strategy where you sell investments that have lost value to realize capital losses. These realized losses can offset capital gains from other investments, reducing your overall capital gains tax. If your losses exceed your gains, you can use up to $3,000 of the excess loss to offset ordinary income each year, with any remaining losses carrying forward to future years.

How Capital Gains and Losses Interact

The IRS requires you to net your capital gains and losses. Short-term gains and losses are netted separately from long-term gains and losses. Then, if you have net gains in one category and net losses in the other, they can offset each other. Short-term losses first offset short-term gains, and long-term losses first offset long-term gains, which can be more tax-efficient since long-term gains are typically taxed at lower rates.

The $3,000 Ordinary Income Offset

If your total capital losses exceed your total capital gains, you have a net capital loss. You can use up to $3,000 of this loss (or $1,500 if married filing separately) to offset ordinary income each year. This can provide tax savings at your ordinary income tax rate, which is often higher than capital gains rates. Any remaining loss beyond $3,000 carries forward to future tax years indefinitely.

Wash-Sale Rules

The wash-sale rule prevents you from claiming a tax loss if you buy a "substantially identical" security within 30 days before or after selling the loss position. This tool does not check for wash-sale violations - it assumes any losses shown are allowed losses for illustration purposes only. You must verify actual trade dates and positions with your broker or tax professional to ensure compliance with wash-sale rules. Violating wash-sale rules can disallow your loss deduction.

Why Actual Results May Differ

This simplified tool does not account for all factors that affect actual tax calculations, including: full IRS netting rules and ordering, wash-sale rule adjustments, state tax differences and rules, complex multi-year carryforward calculations, investment income tax (NIIT) phase-ins, alternative minimum tax (AMT) considerations, transaction costs and fees, and many other complexities. Actual tax returns and broker 1099-B forms may differ significantly from these estimates.