Just the Tip:
Sell an investment at a loss and you can use that loss to offset capital gains from your winners. Up to $3,000 in excess losses can also offset ordinary income each year, and the rest carries forward. Just don’t rebuy the same investment within 30 days, or the wash sale rule voids the loss.
Most investors treat a losing position as dead weight, something to ignore until it recovers. Every unrealized loss in your taxable brokerage account is also a tax break you haven’t claimed yet.
The mechanics follow a strict order. Realized losses first cancel out capital gains, with short-term losses applying to short-term gains and long-term to long-term before crossing over. Whatever remains wipes out up to $3,000 of ordinary income per year, and anything beyond that carries forward indefinitely to future tax years. Harvest an $8,000 loss against $5,000 in gains and the leftover $3,000 comes straight off your ordinary income.
Offsetting short-term gains is the biggest win, since those are taxed at your regular income rate instead of the lower long-term capital gains rate. None of this applies inside an IRA or 401(k). Harvesting only works in taxable accounts.
Scan your taxable account for positions trading below what you paid, especially after a market dip. Sell the loser, then keep your money invested by buying a similar but not substantially identical fund, like swapping one broad-market index fund for a competitor’s comparable fund.
Mind the full wash sale window. It covers 30 days before and after the sale, not just after, and purchases in your IRA or your spouse’s accounts count too. Turn off automatic dividend reinvestment on the position you sold, since a reinvested dividend inside the window can void part of the loss.
A loss only becomes useful once you realize it. Check your taxable account before December 31. Unrealized losses do nothing for this year’s return.
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