Tax-Loss Harvesting Strategy
Time: 60-90 minutes to learn + 30 min per harvesting session Cost: $0 (can save thousands in taxes) Platform: Ape AI (askape.com) + Your brokerage + Tax software Best for: Investors with taxable brokerage accounts seeking to minimize tax burden Companion: Money (for identifying loss opportunities) + Sage (for tax strategy)
What You'll Learn
By the end of this workflow, you'll be able to:
✅ Understand what tax-loss harvesting is and how it saves money
✅ Identify opportunities to harvest losses in your portfolio
✅ Execute tax-loss harvesting trades correctly
✅ Avoid wash sale violations (critical IRS rule)
✅ Carry forward losses to future tax years
✅ Combine tax-loss harvesting with portfolio rebalancing
✅ Calculate the real dollar value of tax savings
What is Tax-Loss Harvesting?
The Basics
Tax-loss harvesting is selling investments at a loss to offset capital gains (and potentially ordinary income) for tax purposes.
Simple Example:
Without Tax-Loss Harvesting:
You sell Stock A for $10,000 profit (capital gain)
You owe taxes: $10,000 × 20% = $2,000 tax bill
Net profit: $10,000 - $2,000 = $8,000
With Tax-Loss Harvesting:
You sell Stock A for $10,000 profit (capital gain)
You also sell Stock B for $10,000 loss (capital loss)
Net capital gain: $10,000 - $10,000 = $0
You owe taxes: $0
Tax savings: $2,000!
You immediately buy a similar (but not identical) stock to replace Stock B
You stay invested while harvesting the tax benefit
You saved $2,000 in taxes WITHOUT changing your overall market exposure!
How It Works
Step 1: Identify positions with losses
Stock bought at $100, now worth $70 = $30 loss per share
Step 2: Sell the losing position
Sell to realize the loss for tax purposes
Step 3: Immediately buy a similar investment
Buy a different but similar stock/ETF
Maintain market exposure (stay invested)
Step 4: Use loss to offset gains
Report loss on tax return
Offsets capital gains dollar-for-dollar
Can also offset $3,000 of ordinary income per year
Excess losses carry forward to future years
Tax Rules You Must Know
Rule #1: Capital Gains Offset
Capital losses offset capital gains in this order:
1. Short-term losses offset short-term gains first
Short-term = held <1 year
Taxed as ordinary income (22-37% tax brackets)
2. Long-term losses offset long-term gains
Long-term = held >1 year
Taxed at preferential rates (0%, 15%, or 20%)
3. Excess losses offset the other type
Remaining short-term losses offset long-term gains
Remaining long-term losses offset short-term gains
4. Remaining losses offset $3,000 of ordinary income
Maximum $3,000 per year
Reduces W-2 wages, interest income, etc.
5. Excess losses carry forward indefinitely
No expiration!
Use in future years following same rules
Example:
2024 Tax Year:
Short-term capital gains: $15,000 (from day trading)
Long-term capital gains: $10,000 (from selling stock held 2 years)
Harvested losses: $20,000 long-term
Calculation:
$20,000 long-term loss offsets $10,000 long-term gain → $0 long-term gain
Remaining $10,000 loss offsets $10,000 short-term gain → $0 short-term gain
Remaining $0, no ordinary income offset
Total capital gains: $0 (vs. $25,000 without harvesting)
Tax Savings:
Short-term gains tax saved: $10,000 × 24% = $2,400
Long-term gains tax saved: $10,000 × 15% = $1,500
Total tax savings: $3,900!
Rule #2: The Wash Sale Rule (CRITICAL!)
IRS Wash Sale Rule:
You cannot claim a tax loss if you buy a "substantially identical" security within 30 days before or after the sale.
The 30-Day Rule:
30 days BEFORE the sale
30 days AFTER the sale
Total: 61-day window
Example of Wash Sale Violation:
❌ WRONG WAY:
Dec 1: Sell 100 shares VTI at a loss
Dec 10: Buy 100 shares VTI (9 days later)
Result: WASH SALE! Loss disallowed, no tax benefit
✅ RIGHT WAY:
Dec 1: Sell 100 shares VTI at a loss
Dec 1: Buy 100 shares SCHB or ITOT (similar but not identical)
Result: Loss allowed, stay invested, no wash sale
What Counts as "Substantially Identical"?
Same ticker = Substantially identical:
Can't sell VTI and buy VTI (obviously)
Can't sell Apple (AAPL) and buy Apple (same stock)
Same index ETF from same provider = Often substantially identical:
VTI (Vanguard Total Market) and VT (Vanguard Total World) = Different (VT includes international)
VTI and VXUS = Different (one is U.S., one is international)
Similar but different index = Usually OK:
VTI (Total Market) → SCHB (Schwab Total Market) = Different providers, OK!
VTI (Total Market) → VOO (S&P 500) = Different index, OK!
SPY (S&P 500 ETF) → IVV (S&P 500 ETF) = Different providers but SAME index, risky
Individual stocks:
Apple → Microsoft = Different companies, OK
Coca-Cola → PepsiCo = Different companies, OK
ExxonMobil → Chevron = Different companies, OK
Bonds:
BND (Total Bond) → AGG (Aggregate Bond) = Similar but different, usually OK
Ask Money Monty to Verify:
Rule #3: Loss Limitation ($3,000 per year)
You can only deduct $3,000 of net capital losses against ordinary income per year.
Example:
Scenario:
Capital gains: $5,000
Capital losses: $25,000
Net capital loss: $20,000
Tax Treatment:
$5,000 loss offsets $5,000 gains → $0 capital gains
$3,000 loss offsets ordinary income (W-2 wages)
Remaining $12,000 loss → Carries forward to next year
Next Year (2025):
You have $12,000 loss carryforward
New capital gains in 2025: $8,000
$8,000 of carryforward offsets $8,000 gains → $0 gains
Remaining $4,000 carryforward available
Can use $3,000 against ordinary income
$1,000 carries to 2026
This can go on for years! Losses never expire.
When to Harvest Losses
Scenario #1: Market Crash / Correction
Best time for tax-loss harvesting = Market crashes
Example (December 2022):
Market down 20-30% for the year
Many positions showing significant losses
Perfect time to harvest
Strategy:
Identify ALL positions with losses
Harvest as many as possible (up to your needs)
Immediately replace with similar ETFs
Use harvested losses against 2022 gains (or carry forward)
Typical harvest during crash:
$20,000-$50,000 in losses (can offset gains for years!)
Scenario #2: Rebalancing
Combine rebalancing with tax-loss harvesting
Example:
Target allocation: 60% stocks, 40% bonds Current allocation: 55% stocks, 45% bonds (stocks underperformed)
Traditional rebalancing:
Sell bonds, buy stocks (could trigger gains on bonds)
Tax-loss harvesting rebalancing:
Sell losing stock positions (harvest losses)
Immediately buy different stock ETFs
Use harvested losses to offset bond gains
Result: Rebalanced AND reduced taxes!
Scenario #3: End-of-Year Planning
December = Tax-loss harvesting season
Why December?
Know your gains for the year
Can calculate how much loss to harvest
Offsets gains realized earlier in the year
Annual process:
November: Review year-to-date capital gains
November: Identify positions with losses
December 1-15: Execute tax-loss harvesting trades
December 31: Ensure 30-day wash sale window doesn't cross into new year (if buying back original)
Important: Don't wait until Dec 30th! Give yourself time for wash sale window.
Scenario #4: Taking Profits
Whenever you sell winners, harvest losses to offset
Example:
Plan: Sell Apple stock (bought at $50, now $200 = $15,000 gain)
Without harvesting:
$15,000 gain × 20% long-term cap gains = $3,000 tax
With tax-loss harvesting:
Identify stocks with $15,000 in losses
Sell those too (harvest losses)
Replace with similar stocks
Net capital gain: $15,000 - $15,000 = $0
Tax savings: $3,000!
How to Execute Tax-Loss Harvesting
Step 1: Identify Loss Opportunities
Use your brokerage:
Fidelity:
Go to Accounts → Positions
Look for "Unrealized Gain/Loss" column
Sort by "Unrealized Loss" (most negative first)
Identify positions down 10%+
Schwab:
Portfolio → Holdings
View "Gain/Loss" column
Filter for losses
Check individual lots if needed (for specific lot harvesting)
Robinhood:
View Holdings
Look for red numbers (losses)
Calculate loss amount
E*TRADE:
Portfolio → Positions
"Gain/Loss" column
Use "Tax Loss Harvesting Tool" (if available)
Using Ape AI Money:
Step 2: Calculate How Much Loss You Need
Ask yourself:
How much capital gains did I realize this year? (Check 1099-B from last year or YTD trades)
Do I have gains I plan to realize soon? (selling appreciated stock)
Do I want to offset ordinary income? (up to $3,000)
Example Calculation:
Your situation:
Realized gains so far: $10,000
Planning to sell Apple (will realize $8,000 gain)
Total gains: $18,000
Target loss to harvest: $18,000 + $3,000 (ordinary income offset) = $21,000
Action:
Identify positions with $21,000 in total losses
Harvest those
Step 3: Choose Replacement Securities
Goal: Replace sold position with similar (but not identical) investment
Common ETF Swaps:
VTI (Vanguard Total Market)
SCHB (Schwab Total Market) OR ITOT (iShares Total Market)
U.S. total market exposure
VOO (Vanguard S&P 500)
SPY (SPDR S&P 500) OR IVV (iShares S&P 500)
S&P 500 exposure
VEA (Vanguard Developed Markets)
SCHF (Schwab International) OR IEFA (iShares Developed Markets)
International developed
VWO (Vanguard Emerging Markets)
IEMG (iShares Emerging Markets) OR SCHE (Schwab Emerging Markets)
Emerging markets
BND (Vanguard Total Bond)
AGG (iShares Aggregate Bond) OR SCHZ (Schwab Aggregate Bond)
U.S. bonds
QQQ (Nasdaq-100)
ONEQ (Nasdaq Composite) OR QQQM (Nasdaq-100 mini)
Tech-heavy growth
Individual Stock Swaps (Same Sector):
Apple (AAPL)
Microsoft (MSFT)
Tech - large cap
Amazon (AMZN)
Shopify (SHOP) OR Alibaba (BABA)
E-commerce
Tesla (TSLA)
Rivian (RIVN) OR Lucid (LCID)
EVs
JPMorgan (JPM)
Bank of America (BAC) OR Wells Fargo (WFC)
Banks
ExxonMobil (XOM)
Chevron (CVX) OR ConocoPhillips (COP)
Energy
Ask Money Monty for Suggestions:
Step 4: Execute the Trades (Same Day!)
CRITICAL: Execute BOTH trades on the same day
Why? Stay invested to avoid missing market movements
Process:
Trade 1 - SELL (Harvest Loss):
Go to position in brokerage
Click "Sell"
Enter full position (or amount you want to harvest)
Order type: Market order (immediate execution)
Submit order
Document: Date, ticker, shares, loss amount
Trade 2 - BUY (Replacement):
Immediately (within minutes) search for replacement ticker
Click "Buy"
Enter dollar amount (same as sale proceeds) OR calculated shares
Order type: Market order
Submit order
Document: Date, ticker, shares, cost
Example Execution:
10:00 AM:
Sell 100 shares VTI at $220 = $22,000 proceeds
Cost basis was $250/share = $25,000
Loss harvested: $3,000
10:05 AM:
Buy $22,000 of SCHB (Schwab Total Market)
At $50/share = 440 shares
Now have SCHB instead of VTI (same exposure, no wash sale)
Result:
Stay invested in total market (just different ETF)
Harvested $3,000 loss for taxes
Can offset $3,000 in gains or ordinary income
Step 5: Track for Wash Sale Period
For the next 30 days after sale:
DO NOT:
❌ Buy back the original security (VTI in example above)
❌ Have dividend reinvestment buy it (turn off DRIP if applicable)
❌ Buy it in another account (IRA, 401k, spouse's account)
YOU CAN:
✅ Hold the replacement security (SCHB)
✅ Buy other different securities
✅ Sell the replacement if needed (independent transaction)
After 31 days:
You CAN buy back the original if you prefer
Wash sale window has closed
Tax loss is safe
Calendar Reminder:
Set reminder for 31 days after sale
Note: "Wash sale period ends, can buy [original ticker] if desired"
Step 6: Document for Tax Return
Keep records:
Date of sale (losing position)
Shares sold
Sale price
Cost basis
Loss amount
Date of purchase (replacement)
Replacement ticker
Your broker will report:
Form 1099-B (capital gains/losses) in January
Shows all sales for the year
Includes whether gain/loss is short-term or long-term
On your tax return (Form 8949 & Schedule D):
Report all capital gains and losses
Losses will offset gains automatically
Up to $3,000 excess loss offsets ordinary income
Remaining losses carry forward to next year (tracked on Schedule D)
Use tax software or CPA:
TurboTax, H&R Block, etc. guide you through
Or hire CPA for complex situations
Advanced Tax-Loss Harvesting Strategies
Strategy #1: Specific Lot Identification
What is it? Selling specific shares you purchased (not FIFO or LIFO)
Why? Maximize loss harvesting while keeping winning lots
Example:
You own 300 shares of Apple bought at different times:
Lot 1: 100 shares at $100/share (now worth $200) = $10,000 gain
Lot 2: 100 shares at $180/share (now worth $200) = $2,000 gain
Lot 3: 100 shares at $220/share (now worth $200) = $2,000 LOSS
Goal: Harvest $2,000 loss without selling winning lots
Action:
Specify "Sell Lot 3 only" (100 shares at $220 cost basis)
Harvest $2,000 loss
Keep Lots 1 and 2 (let winners run)
How to do this:
Fidelity:
When selling, choose "Specific Shares" instead of "First In, First Out"
Select which lots to sell (Lot 3)
Schwab:
Select "Specific Lot" when placing trade
Choose lots with losses
Robinhood:
Not available (uses FIFO automatically) - limitation!
Best brokerages for lot control: Fidelity, Schwab, E*TRADE, Interactive Brokers
Strategy #2: Layering Losses Over Time
Don't harvest all losses at once unless you need them
Why?
You can only use $3,000/year against ordinary income
Harvesting $50,000 loss might take 10+ years to fully utilize
Better to harvest $10-15k/year as needed
Example:
2024:
Harvest $10,000 loss
Offset $7,000 in gains + $3,000 ordinary income
Fully utilized
2025:
Harvest another $12,000 loss
Offset $9,000 in gains + $3,000 ordinary income
Fully utilized
2026:
Harvest $15,000 loss
And so on...
Benefit: Spread out tax savings over multiple years, more efficient use
Strategy #3: Pair Selling
Sell both winners and losers in same year to net out
Example:
Goal: Take profits on Apple (up $20,000) but minimize taxes
Strategy:
Sell Apple: +$20,000 gain
Harvest losses on Tesla, Amazon, etc.: -$20,000 loss
Net capital gain: $0
Tax owed: $0
Result:
Took profits on Apple (de-risked)
Stayed invested (bought replacements for harvested positions)
Paid ZERO capital gains tax
This is how wealthy investors pay minimal taxes while actively managing portfolios!
Strategy #4: Direct Indexing (Advanced/High Net Worth)
What is it? Owning individual stocks that replicate an index (instead of ETF)
Why? Allows harvesting losses on individual stocks throughout year
Example:
Traditional: Own 100 shares of SPY (S&P 500 ETF)
Can only harvest loss if entire SPY is down
Direct Indexing: Own individual shares of all 500 S&P 500 companies
If Apple is down but Microsoft is up, harvest Apple loss
Still maintain S&P 500 exposure overall
Many micro-harvesting opportunities
Benefit:
Can harvest $10k-$30k annually even in UP markets
More tax alpha (extra return from tax savings)
Downside:
Requires $100k-$500k+ portfolio
Complex to manage (usually use service like Wealthfront, Betterment, Parametric)
Higher trading costs
Best for: High net worth investors ($500k+) in high tax brackets
Common Tax-Loss Harvesting Mistakes
Mistake #1: Wash Sale Violation
The Trap: Buy back too soon (within 30 days)
Example:
Dec 5: Sell VTI at loss
Dec 20: "Market is recovering, I want VTI back!"
Buy VTI (only 15 days later)
WASH SALE! Loss disallowed
The Fix:
Wait 31 days
OR buy different fund permanently
OR accept replacement is good enough
Mistake #2: Forgetting About Other Accounts
The Trap: Wash sale rule applies across ALL your accounts
Example:
Dec 5: Sell VTI in taxable brokerage (harvest loss)
Dec 10: Your 401k auto-buys VTI (employer match + contributions)
WASH SALE! Loss disallowed
Accounts that count:
Your IRAs (Traditional, Roth)
Your 401(k)
Spouse's accounts
Joint accounts
The Fix:
Check all accounts before harvesting
Pause 401k contributions temporarily if necessary
Use different funds in retirement accounts
Mistake #3: Harvesting Losses You Don't Need
The Trap: Harvest $50,000 loss but only have $5,000 in gains
Result:
Can only use $5,000 + $3,000 = $8,000 this year
Remaining $42,000 carries forward
Might take 10+ years to use (opportunity cost of trading fees, time)
The Fix:
Only harvest what you can use (this year + $3,000)
Save other loss opportunities for future years
Mistake #4: Not Replacing Immediately
The Trap: Sell losing position but wait to buy replacement
Risk:
Market rallies during your "out of market" time
Miss 5-10% gain in days
Example (March 2020):
March 20: Sell stocks at bottom (harvest losses)
"I'll wait for better entry point"
March 23-April: Market rallies 30%+
You missed entire recovery
The Fix:
SAME DAY replacement purchase
Within minutes or hours, not days/weeks
Mistake #5: Selling Long-Term for Short-Term Replacement
The Trap:
What you sell:
Stock held 2 years (long-term holding)
Generates long-term loss (offsets long-term gains at 15-20% tax)
What you buy:
Replacement stock
Sell it 6 months later (short-term gain)
Taxed at ordinary income (22-37%)
Result:
You created a short-term gain (higher tax) by selling long-term asset
Tax inefficient!
The Fix:
Plan to hold replacements long-term too (1+ year)
Match holding periods when possible
Tax-Loss Harvesting Calculator
Formula to calculate tax savings:
Example:
Scenario:
Harvested loss: $15,000
Offset capital gains: $15,000
Your capital gains tax rate: 15% (long-term)
Tax Savings:
$15,000 × 15% = $2,250 saved
Scenario 2 (No gains, offset ordinary income):
Harvested loss: $10,000
Offset capital gains: $0
Offset ordinary income: $3,000 (max allowed)
Carryforward: $7,000 (for future years)
Your ordinary income tax rate: 24%
Tax Savings (this year):
$3,000 × 24% = $720 saved
Future savings (when carryforward is used):
$7,000 × 15% (assuming future capital gains) = $1,050
Using Sage for Tax Planning
Annual Tax-Loss Harvesting Review:
Wash Sale Checker:
Success Checklist
By the end of this workflow, you should have:
🎉 Congratulations! You've learned a strategy that can save thousands in taxes every year!
What's Next?
Now that you've mastered tax-loss harvesting:
Related Workflows:
Asset Location Optimization - Which accounts for which assets
Portfolio Rebalancing - Combine with harvesting
Monthly Portfolio Review - Track loss opportunities
Multi-Account Portfolio Management - Coordinate across accounts
Continue Learning:
Read IRS Pub 550 (Investment Income and Expenses)
Use tax software with capital gains tracking (TurboTax Premier, H&R Block Premium)
Consider hiring CPA if portfolio >$500k or complex situation
Join r/tax or r/personalfinance for tax strategy discussions
Take Action:
November: Review year-to-date gains
December 1-15: Execute tax-loss harvesting trades
January: Receive 1099-B from broker
Tax season: Report on Schedule D and Form 8949
Remember: Tax-loss harvesting is legal, encouraged, and used by wealthy investors everywhere. It's not "cheating" - it's smart tax planning!
"The hardest thing to understand in the world is the income tax." — Albert Einstein
But tax-loss harvesting? You've got it!
Your future self (and your tax bill) will thank you! 💰📉🎯
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