The three steps of harvesting a loss
| Step | What you do | Watch out for |
|---|---|---|
| 1. Sell the loser | Sell a fund trading below what you paid | Only works in a TAXABLE account |
| 2. Book the loss | Offset gains, then up to $3,000 of income; carry the rest forward | Unused losses carry forward indefinitely |
| 3. Re-buy similar | Buy a not-substantially-identical fund (e.g. VTI then ITOT) | Wash-sale: do not re-buy the SAME fund within 30 days |
The wash-sale rule and how to avoid it
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.
Four ways people trip the wash-sale rule
Wash-sale fine print: the four ways people trip it by accident
| Trap | What happens | How to stay clear |
|---|---|---|
| The window is 61 days, not 30 | It counts 30 days BEFORE the sale, the sale day, and 30 days AFTER -- buying in advance washes the loss too | No purchase of the same fund anywhere in that full window |
| Re-buying inside an IRA | The harshest version: replace the sold fund in your IRA (or Roth) within the window and the loss is PERMANENTLY gone -- it can't be added to any basis | Pause IRA contributions into that same fund during the window, or buy the sibling fund there too |
| Dividend reinvestment (DRIP) | An automatic reinvested dividend in the sold fund counts as a purchase and washes that slice of the loss | Turn off auto-reinvest on a position before harvesting it |
| Spouse and other accounts | Your spouse's accounts and your other accounts all count as 'you' -- a re-buy in any of them triggers the rule | Coordinate the household's accounts before selling |
Harvest a loss without breaking the rule
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.
A real but modest tax edge
Staying on the right side of the wash-sale rule
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?
The psychology of realizing a loss
Related reading: the psychology of harvesting losses
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.
Check your understanding
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: