Glossary
Tax-Loss Harvesting
Tax-loss harvesting is the practice of selling investments that have declined in value to realize a capital loss for tax purposes, while reinvesting the proceeds so the portfolio stays invested.
Realized losses offset realized capital gains dollar for dollar, then up to $3,000 of ordinary income per year, with the remainder carried forward indefinitely. The wash-sale rule polices the maneuver: buying the same or a substantially identical security within 30 days before or after the sale disallows the loss, so harvesters typically swap into a similar-but-not-identical fund.
Why it matters in practice
Harvesting converts market declines into a usable tax asset without changing the portfolio's market exposure. It only applies in taxable accounts — losses inside IRAs and 401(k)s have no tax value — and it lowers cost basis, so some of the benefit is deferral rather than elimination.
In California
The stakes are higher for Californians: the state taxes capital gains as ordinary income at rates up to 13.3%, so combined federal-plus-state savings from a harvested loss can be substantially larger than in states without an income tax.
Related terms: Wash-Sale Rule · Capital Gain · Cost Basis · Rebalancing