Tax-Loss Harvesting

tax loss harvestingTLHtax-loss selling

Tax-loss harvesting is a strategy that sells investments at a loss to offset capital gains taxes, then reinvests in similar (but not identical) securities to maintain portfolio exposure.

Current Macro RegimeSTAGFLATION→ STABLE

We are in a STABLE STAGFLATION regime — growth decelerating (GDPNow 1.3%) while inflation remains sticky and potentially re-accelerating (Cleveland nowcasts alarming). The Fed is trapped at 3.75%, unable to cut or hike without making one problem worse. Net liquidity expansion ($5.95trn, +$151bn 1M) …

Analysis from Apr 19, 2026

What Is Tax-Loss Harvesting?

Tax-loss harvesting (TLH) is an investment strategy that reduces taxes by selling securities that have declined in value, realizing the capital loss, and using that loss to offset capital gains taxes owed on profitable investments. The sold position is then replaced with a similar investment to maintain the portfolio's risk and return characteristics.

The strategy effectively allows investors to defer taxes by using current losses to offset current gains. The deferred taxes can compound over time, providing a meaningful boost to after-tax wealth accumulation.

How Tax-Loss Harvesting Works

The process involves three steps. Identify losses: Review the portfolio for positions trading below their purchase price. Sell to realize the loss: The sale makes the paper loss a real, tax-deductible loss. Reinvest in a similar asset: Purchase a comparable (but not substantially identical) security to maintain market exposure.

The wash sale rule is the critical constraint. You cannot repurchase the same or a substantially identical security within 30 days before or after the sale. Violating this rule disallows the tax loss. To navigate this, investors substitute with similar but legally distinct securities: a different fund tracking a different index, a competitor stock in the same sector, or an ETF substituted for a mutual fund of a different index.

Realized losses offset gains in this priority: short-term losses offset short-term gains first (which are taxed at higher ordinary income rates), then long-term losses offset long-term gains (taxed at lower capital gains rates). Up to $3,000 of net losses can offset ordinary income, with any remainder carried forward indefinitely.

Tax-Loss Harvesting Best Practices

The strategy is most valuable in taxable brokerage accounts. Tax-advantaged accounts (IRAs, 401(k)s) do not benefit because gains are not taxed annually. Volatile markets provide more harvesting opportunities as positions frequently dip below cost basis.

Automated harvesting through robo-advisors scans portfolios daily for harvesting opportunities, capturing losses that manual review might miss. This continuous monitoring can harvest small losses throughout the year that collectively provide significant tax savings.

Frequently Asked Questions

▶How does tax-loss harvesting work?

Tax-loss harvesting involves selling a security that has declined in value to realize a capital loss. This loss can offset capital gains from other investments, reducing your tax bill. After selling, you reinvest the proceeds in a similar (but not substantially identical) security to maintain your market exposure. For example, selling an S&P 500 index fund at a loss and immediately buying a total stock market fund preserves your equity exposure while realizing the tax loss. Realized losses can offset gains dollar-for-dollar, and up to $3,000 in excess losses can offset ordinary income annually, with remaining losses carried forward to future years.

▶What is the wash sale rule?

The wash sale rule prevents investors from claiming a tax loss if they buy a "substantially identical" security within 30 days before or after the sale. If you sell a stock for a loss and repurchase the same stock within this 61-day window (30 days before + sale day + 30 days after), the loss is disallowed for tax purposes. To comply, investors replace the sold security with a similar but not identical one (e.g., selling one large-cap index fund and buying a different large-cap index fund). The rule also applies across accounts, including IRAs, and to options on the same security.

▶Is tax-loss harvesting worth it?

For taxable investment accounts with significant capital gains, tax-loss harvesting can add meaningful value, estimated at 0.5-1.5% of after-tax returns annually depending on the market environment and account characteristics. The benefits are greatest during volatile markets with frequent price declines, in larger accounts with more harvesting opportunities, and for investors in higher tax brackets. The strategy has minimal benefit in tax-advantaged accounts (IRAs, 401(k)s) since gains are not taxed annually. Transaction costs and tracking the wash sale rule add complexity. Automated robo-advisors have made tax-loss harvesting more accessible and cost-effective.

Tax-Loss Harvesting is one of the signals monitored daily in the AI-driven macro analysis on Convex Trading. The platform synthesises data across monetary policy, credit, sentiment, and on-chain metrics to generate actionable trade recommendations. Create a free account to build your own signal layer and see how Tax-Loss Harvesting is influencing current positions.

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