Selling an investment that’s down in a taxable account turns a paper loss into a tax break. The loss cancels gains you’ve taken, and up to $3,000 a year beyond that comes off your ordinary income. Reinvest in something similar but not substantially identical, and wait 31 days before buying back what you sold.
A losing position in a taxable brokerage account does nothing for your taxes while you hold it, and only a sale by December 31 counts on this year’s return. The trade date, not the settlement date, decides the year.
The IRS subtracts your capital losses from your capital gains first. If losses are left over, up to $3,000 of them ($1,500 if you’re married filing separately) comes off your ordinary income, and the rest carries forward to later years.
Say you’ve taken $4,000 in long-term gains this year and hold a fund that’s down $7,000. Selling it wipes out those gains and deducts the other $3,000 from your income. At a 15% capital gains rate and a 22% tax bracket, that’s $1,260 less tax.
Reinvest the proceeds right away in something similar but not substantially identical, such as a fund built on a different index, so your money stays in the market. The IRS weighs what’s substantially identical case by case, which is why a different index is the safer swap.
Buying a substantially identical investment from 30 days before the sale through 30 days after it triggers the wash sale rule. The loss is disallowed and added to the new shares’ cost, which only postpones it. A purchase by your spouse counts too, and a buy inside your IRA or Roth IRA erases the loss for good.
Harvesting mostly delays tax rather than erasing it, since the replacement starts at a lower cost basis and will show a bigger gain when you sell. That delay still pays. The tax you put off stays invested, and a loss deducted against ordinary income now may come back later as a gain taxed at a lower long-term rate. Set a reminder for early December, when there’s still time to sell and to check the prior 30 days for purchases.
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