Tax-Loss Harvesting Calculator

Tax-loss harvesting means selling a position at a loss deliberately, to use that loss against gains elsewhere. The loss is real, but so is the tax saving, and the shares can usually be replaced with something similar so the market exposure barely changes.

The netting order is fixed by statute and works in the taxpayer's favour. Short-term losses offset short-term gains first — those are taxed at ordinary income rates, up to 37%, so this is the most valuable offset available. Long-term losses then offset long-term gains, taxed at 0%, 15% or 20%. Anything left over crosses between the two categories.

Only after all that can a net loss offset ordinary income, and there the cap is $3,000 a year. Whatever remains carries forward indefinitely, to be used the same way in future years.

The $3,000 annual limit on offsetting ordinary income was set in 1978 and has never been indexed. In today's money it would be over $14,000.

The consequence is that a very large harvested loss can be worth far less than its face value. Someone who realises a $100,000 loss with no gains to offset it can only use $3,000 a year — more than three decades to absorb it, with the benefit eroded by inflation the whole way. The loss carries forward indefinitely, so nothing is lost outright, but the present value is a fraction of the headline number.

That is why harvesting is most effective when there are gains to offset in the same year. Against gains, a loss is used immediately and in full. Against ordinary income alone, it trickles.

Selling at a loss and immediately buying the same thing back would let anyone harvest losses at will without changing their position. The wash-sale rule prevents it: if you acquire the same or a substantially identical security within 30 days before *or* after the sale, the loss is disallowed.

That is a 61-day window in total, and the "before" half surprises people — buying more of a stock and then selling an older lot at a loss within 30 days triggers it just as surely as buying back afterwards.

Most accidental wash sales come from automation. Dividend reinvestment buying a few shares inside the window will disallow a proportionate part of the loss. So will a purchase in an IRA — the rule applies across all your accounts, including retirement accounts, and a wash sale triggered inside an IRA is worse than usual because the basis adjustment is lost entirely.

The workarounds are straightforward. Wait 31 days before repurchasing, or buy something similar but not substantially identical — a different index fund tracking a related but distinct index, for instance. "Substantially identical" is not precisely defined for funds, which is why swapping between two different providers' S&P 500 trackers is generally considered risky while moving from an S&P 500 fund to a total-market fund is widely accepted.