The definition, precisely
Tax-loss harvesting is the deliberate realization of capital losses to reduce taxable income. The mechanics are statutory: net capital losses offset capital gains without limit, then up to $3,000 of ordinary income per year ($1,500 married filing separately), with any remainder carried forward indefinitely. The strategy layer is reinvestment — selling the losing position and immediately buying a similar-but-not-identical one, so market exposure continues while the tax loss banks. Harvest without reinvesting and you have simply sold low.
How the harvest actually works
Short-term losses are the prize: they offset short-term gains taxed at ordinary rates first. A sound harvest therefore ranks positions by character, sells losers to cover realized winners, and stops at the $3,000 ordinary-income kicker unless gains justify more. The reinvestment must dodge §1091 — no repurchase of the same or substantially identical security in the 30 days before or after, across all accounts including IRAs and a spouse's holdings. Index-fund harvesters swap to a tracking-but-different fund; single-stock harvesters wait out the window in cash or a peer.
The fine print
Three traps end harvests badly. Automatic dividend reinvestment inside the window creates wash sales the broker may not flag. Harvesting inside retirement accounts produces nothing deductible — worse, an IRA repurchase can permanently disallow a taxable-account loss. And state law varies: some states ignore the federal carryforward. The December rush is real but the discipline is year-round — dips harvested in March count exactly as much as dips harvested in December.
Frequently Asked Questions
- Losses offset capital gains dollar for dollar, plus up to $3,000 of ordinary income a year, with the rest carried forward indefinitely. A $30,000 harvest against short-term gains can be worth five figures of tax.
- IRC §1091: buy the same or substantially identical security within 30 days before or after the sale and the loss is disallowed — added to the new shares' basis instead. The 61-day window includes dividend reinvestments.
- No. Losses inside IRAs and 401(k)s are neither deductible nor harvestable — and buying the same security in your IRA within the window can trigger a wash sale on the taxable-account loss permanently.
- Both. December captures the year's net position before it closes; year-round harvesting catches dips the calendar would miss. The December deadline is real: the sale must settle in the tax year.