Question 1

What is tax-loss harvesting and is it worth doing?

Accepted Answer

Tax-loss harvesting means selling investments at a loss in taxable accounts to offset capital gains and potentially reduce other taxable income. It can be worthwhile when tax savings outweigh trading costs and investment disruptions. Benefits depend on your tax situation; observe wash-sale rules, which restrict deductions when substantially identical securities are purchased 30 days before or after the sale.

Question 2

What is the wash sale rule?

Accepted Answer

The wash sale rule disallows a loss if you buy the same or a substantially identical security within 30 days before or after selling it at a loss. The disallowed loss is added to the cost of the new shares, so it is delayed rather than lost. The rule also applies to purchases in your IRA and, generally, your spouse's accounts.

Question 3

How much of a capital loss can I deduct?

Accepted Answer

Capital losses first offset capital gains, without limit. If losses exceed gains, you can deduct up to $3,000 a year against ordinary income, or $1,500 if married filing separately. Any remaining loss carries forward to future years indefinitely, so a large harvested loss can offset gains for years to come.

Question 4

Does tax-loss harvesting work in an IRA?

Accepted Answer

No. Gains and losses inside an IRA or 401(k) have no current tax effect, so there is nothing to harvest. Tax-loss harvesting applies only to taxable brokerage accounts. Selling at a loss in a taxable account and buying the same security in your IRA within 30 days can also trigger the wash sale rule.

What is tax-loss harvesting and is it worth doing?