What Is Tax-Loss Harvesting? Reducing Your Tax Bill on Investments

The wash sale rule (IRS Section 1091) disallows a capital loss deduction if you purchase the "substantially identical" security within 30 days before or after the sale that generated the loss. The 61-day window applies across all your accounts, taxable brokerage, IRA, Roth IRA, and even your spouse's accounts.

To avoid triggering the wash sale rule: immediately buy a different fund that tracks the same asset class but uses a different index or methodology. For example, sell a Vanguard total market ETF and buy a Fidelity total market ETF, similar exposure, not substantially identical. Do not buy the same security in any account, including retirement accounts, within the 31-day window. If you accidentally trigger the wash sale rule, the disallowed loss is added to the cost basis of the replacement security and eventually recovered when you sell it, but you lose the current-year tax benefit.

No. Tax-loss harvesting only works in taxable brokerage accounts. Losses inside traditional IRAs and Roth IRAs are not recognized for federal tax purposes, you cannot sell a losing investment in your IRA and claim a capital loss deduction on Schedule D.

The IRS treats all activity inside tax-advantaged accounts as occurring in a tax-deferred or tax-free environment, so neither gains nor losses inside those accounts appear on your tax return. Additionally, buying a replacement security in your IRA or Roth IRA after selling a loss in your taxable account can trigger the wash sale rule, which applies across all accounts. If the wash sale rule is triggered through an IRA repurchase, the disallowed loss is permanently lost (it cannot be added to IRA basis), making this one of the more costly harvesting mistakes.

The savings depend on your tax rate and the size of the loss. For a high-income Nevada investor subject to the 20% long-term capital gains rate plus 3.8% Net Investment Income Tax (NIIT), a $50,000 harvested loss offsets $50,000 in long-term gains, saving $11,900 in federal tax (23.8% x $50,000). For moderate-income investors in the 15% capital gains bracket, the same $50,000 saves $7,500 in federal tax.

For ordinary income offset (up to $3,000 per year), the savings equal $3,000 times your marginal income tax rate, between $660 and $1,110 at the 22%–37% brackets. Nevada residents save only federal taxes since Nevada has no state capital gains tax. This is simpler than the math for California residents who would add up to 13.3% state savings, but the federal savings alone are substantial for high-income households with significant investment portfolios.

Tax-loss harvesting can still be valuable for smaller portfolios, but the economics are more modest. For a $75,000 portfolio with an $8,000 loss, offsetting that loss against gains at 15% saves $1,200 in federal tax. If you have no gains to offset, you can still deduct up to $3,000 against ordinary income, worth $660–$1,110 depending on your bracket, with the remaining $5,000 carrying forward to future years.

For smaller portfolios, the key considerations are: transaction costs (commissions, though these are now typically $0 at major brokerages); tracking the wash sale rule carefully across accounts; and whether the time investment is worth it for smaller amounts. Annual or opportunistic harvesting during significant market downturns makes the most sense for smaller portfolios, rather than frequent harvesting of small losses. The strategy becomes more powerful and clearly worthwhile as portfolio size grows beyond $250,000 and capital gains exposure increases.