Tax‑Loss Harvesting Guide — How to Reduce Capital Gains Taxes
By MPWR Finance • Updated Oct 2025 • Read time: 7 min
Tax‑loss harvesting can convert investment losses into tax savings. This guide explains rules, examples, and a simple workflow to safely harvest losses without violating IRS rules.
What Is Tax‑Loss Harvesting
Tax‑loss harvesting means selling securities at a loss to offset capital gains elsewhere in your portfolio, lowering your tax bill for the year.
How the Math Works
Example: If you have $10,000 in realized capital gains and $4,000 in realized losses, taxable net gain becomes $6,000. Losses reduce taxable gains dollar-for-dollar and can offset up to $3,000 of ordinary income per year if losses exceed gains.
Key Rules to Follow
- Wash‑Sale Rule — avoid repurchasing the same or “substantially identical” security within 30 days before or after the sale
- Document trades and timestamps to demonstrate intent and compliance
- Consider using similar but not identical ETFs to maintain market exposure
Practical Steps
- Identify candidates with meaningful unrealized losses
- Calculate the tax impact (long vs short term)
- Sell the losing position before year‑end
- Optionally buy a replacement ETF to maintain exposure
- Track the 30‑day window for wash‑sale compliance
Example Scenario
Investor A has $8k realized gains from stock sales and $5k unrealized losses. By selling $5k of losers, he reduces taxable gains to $3k, saving taxes at his capital gains rate.
Actionable Checklist
- Run a tax‑impact model for realized vs unrealized positions
- Prefer ETFs with different tickers when replacing positions
- Consult a tax advisor before large moves
FAQ
Does the wash‑sale rule apply between IRAs and taxable accounts
Yes — buying the same security in an IRA within the wash‑sale window can disallow the loss in your taxable account.
Can robo‑advisors do tax‑loss harvesting automatically
Many robo‑advisors offer built‑in harvesting for taxable accounts; check their policies on replacement securities and timing.
Author: MPWR Finance • Disclaimer: This is educational content and not tax advice.
