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Not investment advice. Educational reading. See Disclaimer.
L.10 · BEGINNER · 2 MIN

Tax-Loss Harvesting -- The Mechanics

Tax-loss harvesting (TLH) is selling an investment that is down to realize a loss on paper, using that loss to offset capital gains (and up to $3,000 of ordinary income per year), then immediately buying a similar -- but not identical -- fund so you stay invested. You keep your market exposure while booking a tax deduction. This module is the HOW; bf-13 covers the behavioral why.

Quiz · 5 questions ↓
§ 01
StepWhat you doWatch out for
1. Sell the loserSell a fund trading below what you paidOnly works in a TAXABLE account
2. Book the lossOffset gains, then up to $3,000 of income; carry the rest forwardUnused losses carry forward indefinitely
3. Re-buy similarBuy a not-substantially-identical fund (e.g. VTI then ITOT)Wash-sale: do not re-buy the SAME fund within 30 days
§ 02

The wash-sale rule (IRC Section 1091) disallows the loss if you buy the same or a 'substantially identical' security within 30 days before or after the sale. The fix: swap to a DIFFERENT fund tracking a similar index (sell VTI, buy ITOT) so you keep market exposure without triggering the rule. Verify current limits against irs.gov Topic 409.

§ 03
Only relevant in a taxable account: if a holding is underwater near year-end, you can harvest the loss and rotate into a sibling fund -- but never re-buy the identical fund within 30 days, or the loss is disallowed.
§ 04

Tax-loss harvesting is a real but modest edge -- a few hundred dollars of tax deferral in a normal year, more in a crash. It is NOT a reason to sell good investments; it is a way to make a paper loss slightly useful while staying invested.

§ 05
You want to harvest a loss on VTI but stay invested in US stocks. What keeps you on the right side of the wash-sale rule?
§ 06

This module is the mechanics; the harder part is doing it without flinching. Behavioral Finance module bf-13 (Tax-Loss Harvesting Psychology) covers why realizing a loss feels like admitting defeat -- and when the math should override that instinct.

Five questions · AI feedback

Sit with the ideas.

After selling a fund at a loss to harvest it, what does the wash-sale rule prevent you from doing?

Why:

Other lessons in this course.

  1. 01Asset Allocation by Time Horizon
  2. 02Stocks vs Bonds vs Cash: The Numbers
  3. 03The Three-Fund Portfolio
  4. 04Target-Date Funds and Glide Paths
  5. 05Opening a Brokerage Account
  6. 06Funding Your Account and Your First Buy
  7. 07Dollar-Cost Averaging vs Lump-Sum
  8. 08Rebalancing Rules: Calendar vs Threshold
  9. 09Asset Location: Which Account Holds What
  10. 10Tax-Loss Harvesting -- The Mechanics— reading now
  11. 11I-Bonds and TreasuryDirect
  12. 12Sequence-of-Returns Risk
  13. 13Equity Compensation as Concentrated Risk
  14. 14The 5 / 10 / 30-Year Checkup
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