# Tax-Loss Harvesting: Turning Losses into a Tax Asset
Tax-loss harvesting is the practice of selling an investment at a loss to realize that loss for tax purposes, then immediately reinvesting in a similar (but not identical) investment to maintain market exposure. The result: an immediate tax deduction with no meaningful change in portfolio exposure.
How it works
You hold VTSAX (Vanguard Total Stock Market Index Fund) purchased at $100/share. It's now trading at $85 — a $15 unrealized loss. You sell VTSAX, realizing a $15/share capital loss, and immediately buy SCHB (Schwab U.S. Broad Market ETF) — a highly correlated fund that tracks essentially the same market.
You've locked in a tax loss with no material change in portfolio exposure. The loss offsets capital gains dollar-for-dollar. If you have no gains, up to $3,000 of excess losses can offset ordinary income annually, with the remainder carrying forward indefinitely.
The tax math
**Offsetting capital gains:** A $10,000 harvested loss offsets $10,000 in capital gains. If those gains would have been taxed at 15% long-term capital gains rate, you've saved $1,500 in taxes — immediately.
**The deferral effect:** Even if you can't offset gains today, losses carry forward. The deferred tax is still deferred capital gains in your replacement position — you've essentially borrowed from the future, and that borrowing compounds in your favor as long as the tax is deferred.
**Ordinary income offset:** In the absence of gains, losses offset ordinary income at your marginal rate — potentially worth 22–37% vs. the 15% they'd offset at long-term capital gains rates when eventually realized.
Interactive Model
Tax-Loss Harvesting Value Calculator
Estimate the dollar value of harvesting a loss — including the deferral benefit and future cost.
Tax-loss harvesting value analysis
Common wash-sale compliant fund swap pairs
Wash-sale rule: cannot repurchase "substantially identical" security within 30 days before or after sale. Fund pairs shown are commonly used but not legal advice — consult a tax advisor for your situation.
The wash-sale rule
The IRS wash-sale rule prevents you from claiming a loss if you buy a "substantially identical" security within 30 days before or after the sale. You cannot sell SPY and immediately buy SPY, claim a loss, and buy SPY back the next day.
What you can do: sell SPY (S&P 500) and buy VTI (Total Market) or IVV (another S&P 500 ETF issued by a different company). The IRS has never formally defined "substantially identical" for index funds, but different-fund-family ETFs tracking similar (not identical) indices are generally considered acceptable.
Common swap pairs: VTSAX ↔ FSKAX, VTI ↔ SCHB, VXUS ↔ IXUS, AGG ↔ BND.
Who benefits most
Tax-loss harvesting has the highest value for: - Investors in high tax brackets (32%+ ordinary income) - Investors with significant taxable accounts and existing capital gains - Investors in volatile markets (more loss opportunities) - Investors with long time horizons (losses compound via deferral for decades)
Robo-advisors like Betterment and Wealthfront automate daily tax-loss harvesting. For large taxable accounts, this automation can add 0.1–0.5% annually in after-tax returns.
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*Related: [Rebalancing](./rebalancing) — tax-loss harvesting and rebalancing often happen together. [Income tax brackets](./income-tax-brackets-explained) — your bracket determines the value of each harvested loss.*