Here’s money most investors leave on the table every year: tax deductions from investment losses.

When you sell an investment at a loss, you can use that loss to offset capital gains—or even reduce your ordinary income by up to $3,000/year.

Most people only think about this in December when their advisor mentions it. But tax loss harvesting is a year-round strategy that, done correctly, saves $3,000-10,000 annually in taxes.

And if you use robo-advisors, it happens automatically without you lifting a finger.

Here’s how tax loss harvesting works, when to do it, how to avoid the wash sale rule that kills the strategy, and whether you should automate it or do it manually.

What Is Tax Loss Harvesting?

Tax loss harvesting = selling investments at a loss to offset capital gains taxes.

The basic mechanic:

1. You sell an investment that’s down (realize the loss)
2. You use that loss to offset capital gains (or up to $3,000 of ordinary income)
3. You immediately buy a similar (but not identical) investment to maintain market exposure

Example:

You bought 100 shares of Tesla at $300 ($30,000 investment).
Tesla drops to $200. Your position is worth $20,000.
Unrealized loss: $10,000

You sell Tesla and realize the $10,000 loss.
You immediately buy an EV-focused ETF to maintain similar exposure.
You use the $10,000 loss to offset capital gains from other investments.

If you’re in the 15% capital gains tax bracket:
Tax savings: $10,000 × 15% = $1,500

The Three Ways to Use Capital Losses

Use 1: Offset Capital Gains (Dollar-for-Dollar)

Short-term capital gains (investments held <1 year):
Taxed as ordinary income (up to 37%)

Long-term capital gains (investments held 1+ years):
Taxed at 0%, 15%, or 20% depending on income

Losses offset gains in this order:

1. Short-term losses offset short-term gains
2. Long-term losses offset long-term gains
3. Any remaining losses offset the other type
4. Excess losses offset ordinary income (up to $3,000/year)
5. Remaining losses carry forward to future years

Example:

You have:

• $15,000 in long-term capital gains (from selling Apple stock)
• $10,000 in losses (from tax loss harvesting)

Taxable gain: $15,000 – $10,000 = $5,000

At 15% long-term capital gains rate:
Tax savings: $10,000 × 15% = $1,500

Use 2: Offset Ordinary Income (Up to $3,000/Year)

If your capital losses exceed your capital gains, you can deduct up to $3,000 per year from ordinary income.

Example:

You have:

• $0 in capital gains this year
• $8,000 in capital losses (from tax loss harvesting)

You can deduct:

• $3,000 against ordinary income (2026)
• $3,000 carry forward (2027)
• $2,000 carry forward (2028)

Tax savings (assuming 24% bracket):
Year 1: $3,000 × 24% = $720
Year 2: $3,000 × 24% = $720
Year 3: $2,000 × 24% = $480
Total: $1,920

Use 3: Carry Losses Forward Indefinitely

Capital losses never expire.

If you harvest $50,000 in losses this year and only have $10,000 in gains, you can carry forward $40,000 to offset future gains forever.

This is powerful for high earners who might:

• Sell a business (huge capital gain)
• Exercise stock options (taxable event)
• Sell real estate (big gain)

Having a “bank” of carried-forward losses protects you from future tax hits.

The Wash Sale Rule (The One Thing That Can Ruin Everything)

The IRS knows people would abuse tax loss harvesting by selling and immediately rebuying the same stock.

The wash sale rule says:

If you sell a security at a loss and buy a “substantially identical” security within 30 days before or after the sale, you cannot claim the loss.

The 61-day window:

• 30 days before the sale
• The day of the sale
• 30 days after the sale

Example of a wash sale (DISALLOWED):

December 15: You sell 100 shares of VTI at a $5,000 loss
December 20: You buy 100 shares of VTI again
Result: Wash sale. Loss is disallowed.

The “substantially identical” test:

These trigger wash sales:

• Same stock (Tesla → Tesla)
• Same ETF (VTI → VTI)
• Same mutual fund (VTSAX → VTSAX)

These do NOT trigger wash sales:

• Different stock in same sector (Tesla → Rivian)
• Different ETF tracking same index (VTI → SCHB)
• ETF → similar mutual fund (VTI → VTSAX… maybe, it’s debated)

Important: The IRS doesn’t have clear guidance on whether VTI (Vanguard Total Market ETF) and VTSAX (Vanguard Total Market mutual fund) are “substantially identical.” Most tax pros say they’re different enough, but it’s a gray area.

How to Avoid Wash Sales (Practical Strategies)

Strategy 1: Buy a Similar But Different Fund

Instead of selling and rebuying the same fund, buy a comparable alternative.

Examples:

After 31 days: You can swap back if you want.

Strategy 2: Wait 31 Days

Sell the losing position. Wait 31 days. Buy it back.

Downside: You’re out of the market for a month. If the stock rebounds, you miss gains.

When this works: If you’re confident the stock will stay flat or keep falling.

Strategy 3: Double Up, Then Sell

The “doubling” strategy:

1. Buy more shares of the losing position (doubling your position)
2. Wait 31 days
3. Sell the original shares at a loss
4. Keep the new shares

Example:

You own 100 shares of Tesla at $300 (cost: $30,000).
Tesla is now $200 (value: $20,000).

Day 1: Buy 100 more shares at $200 (cost: $20,000).
You now own 200 shares worth $40,000.

Day 32: Sell the original 100 shares at $200.
Realized loss: $10,000 ($30,000 cost – $20,000 sale).

You maintain market exposure AND harvest the loss.

Downside: You need the cash to double your position for 31 days.

When to Tax Loss Harvest

Most people do it in December. That’s fine, but you’re leaving money on the table.

Better approach: Harvest throughout the year whenever opportunities arise.

Trigger 1: Market Corrections

When the market drops 10-20%, individual positions will be down even more.

Example (March 2020 COVID crash):

S&P 500 dropped 34% in a month. If you harvested losses then, you could have banked $50,000+ in losses while staying invested in similar funds.

Actionable: Check your portfolio after any 10%+ market drop.

Trigger 2: Individual Stock Drops

Even in a bull market, individual stocks get crushed.

Example:

You bought Meta at $350 in 2021.
It dropped to $90 in 2022.
That’s a 74% loss.

Harvest that loss. Buy a similar tech stock or a tech ETF.

You just banked a massive tax loss while staying in tech.

Trigger 3: Year-End Review (December)

Check your portfolio on December 15 every year.

Look for:

• Positions down 5%+
• Positions you’re willing to swap for similar alternatives
• Losses that offset big gains you realized earlier in the year

Even small losses add up.

10 positions down $500 each = $5,000 in losses = $750-1,000 in tax savings.

Tax Loss Harvesting Strategy (Step-by-Step)

Step 1: Identify Losing Positions

Log into your brokerage. Look for any position with an unrealized loss.

Most brokerages show this as:

• “Gain/Loss” column
• Green = gain, Red = loss

Target: Losses of $1,000+

Small losses aren’t worth the transaction costs and mental energy.

Step 2: Check Your Cost Basis

Make sure you know which shares you’re selling.

If you bought the same stock at different times (different prices), you have multiple “tax lots.”

Example:

You bought Tesla:

• 50 shares at $300 (Lot 1)
• 50 shares at $250 (Lot 2)
• 50 shares at $200 (Lot 3)

Tesla is now $180.

Which lot do you sell?

Lot 1 (highest cost basis) → $300 – $180 = $120 loss per share = $6,000 total loss (best)

Most brokerages default to FIFO (first in, first out). But you can specify “highest cost” when selling to maximize the loss.

Step 3: Sell the Losing Position

Place the sell order. Make sure you’re selling the highest-cost-basis shares.

Confirmation: You’ll see the loss reflected in your “realized gains/losses” for the year.

Step 4: Immediately Buy a Similar Position

Within the same day (or next day), buy a similar but not identical fund.

Why immediately? You don’t want to miss market rebounds.

This keeps you invested while banking the tax loss.

Step 5: Record the Transaction

Keep a spreadsheet:

This helps at tax time and ensures you’re not accidentally triggering wash sales.

Robo-Advisors That Automate Tax Loss Harvesting

If you don’t want to manually tax loss harvest, robo-advisors do it automatically.

Betterment

Tax loss harvesting: Automatic on all accounts $50K+
Fees: 0.25% annually
How it works: Monitors daily for loss opportunities, swaps between similar ETFs

Example:

You invest $100,000.
Market drops 15%. Your portfolio is worth $85,000.
Betterment automatically sells losing positions and buys similar ETFs.
You harvest $15,000 in losses without doing anything.

Tax savings (15% cap gains rate): $2,250

Wealthfront

Tax loss harvesting: Automatic on all taxable accounts
Fees: 0.25% annually
How it works: Daily monitoring, swaps between primary and secondary ETFs

Wealthfront claims: Average $2,000-6,000 in annual tax savings for $100K+ portfolios.

M1 Finance

Tax loss harvesting: Manual (you trigger it)
Fees: $0 (free)
How it works: You rebalance and it swaps positions

Best for: DIY investors who want control but some automation.

Vanguard Personal Advisor Services

Tax loss harvesting: Automatic for $500K+ accounts
Fees: 0.30% annually
How it works: Human advisors + algorithm

Best for: High-net-worth investors who want human + robo combo.

Manual vs Automated Tax Loss Harvesting

Manual (DIY):

Pros:

• $0 cost (no robo-advisor fees)
• Full control
• Can optimize around specific tax situations

Cons:

• Time-consuming
• Easy to forget or miss opportunities
• Risk of wash sale mistakes

Best for: Investors with <$100K who don’t want to pay 0.25% fees.

Automated (Robo-Advisors):

Pros:

• Happens daily without you thinking about it
• No wash sale risk (algorithm handles it)
• Maximizes losses (checks every day, not just December)

Cons:

• 0.25% annual fee
• Less control over exact positions

Best for: Investors with $100K+ who want hands-off optimization.

Advanced Tax Loss Harvesting Strategies

Strategy 1: Offset Big Capital Gains Events

If you’re selling a business, exercising stock options, or selling real estate:

Harvest massive losses in the years leading up to the event.

Example:

You’re selling your startup in 2027 for $5M (after-tax proceeds).
Expected capital gains: $4M.
Tax owed (20% rate): $800,000.

Strategy:

In 2025-2026, harvest $50,000-100,000 in losses annually.
By 2027, you have $150,000 in carried-forward losses.

New tax owed: ($4M – $150,000) × 20% = $770,000

Tax savings: $30,000

Strategy 2: Pair with Roth Conversions

If you’re doing Roth conversions:

Harvest losses to offset the taxable income from the conversion.

Example:

You convert $50,000 from Traditional IRA to Roth.
That $50,000 is taxable income.

But you also harvest $30,000 in capital losses.
$3,000 offsets the conversion income this year.
$27,000 carries forward.

You reduced your tax hit from the Roth conversion.

Strategy 3: Harvest in Low-Income Years

If you have a year with unusually low income (sabbatical, job gap, early retirement):

Harvest losses even if you don’t have gains to offset.

Why?

You can use $3,000 against ordinary income every year. If you’re in a lower tax bracket temporarily, you’re not wasting high-bracket deductions.

But: Carried-forward losses are valuable. Don’t waste them just to use $3,000 if you’ll be in a higher bracket later.

Common Tax Loss Harvesting Mistakes

Mistake 1: Triggering a Wash Sale

Most common error: Selling a stock and buying it back within 30 days.

Solution: Use the alternatives table above. Swap for a similar fund.

Mistake 2: Harvesting Losses in Tax-Advantaged Accounts

You cannot tax loss harvest in:

• 401(k)s
• IRAs (Traditional or Roth)
• HSAs

Why? These accounts are already tax-advantaged. Losses inside them don’t create deductions.

Tax loss harvesting only works in taxable brokerage accounts.

Mistake 3: Selling Winners to Offset Losers

Bad logic: “I’ll sell some gains to offset my losses.”

No. You want to keep winners and sell losers.

Tax loss harvesting = selling losers while keeping winners and staying invested.

Mistake 4: Forgetting About State Taxes

Most states recognize capital losses the same way the IRS does.

Example (California):

Federal capital gains rate: 15%
California rate: 9.3% (for high earners)
Total rate: 24.3%

$10,000 loss saves:
$10,000 × 24.3% = $2,430 (not just $1,500)

State taxes make tax loss harvesting even more valuable.

Is Tax Loss Harvesting Worth It?

The math:

Manual approach:

• Time: 2-3 hours per year
• Cost: $0
• Benefit: $1,000-3,000/year in tax savings

Robo-advisor approach:

• Time: 0 hours (automated)
• Cost: 0.25% on portfolio ($250/year on $100K)
• Benefit: $2,000-6,000/year in tax savings

For portfolios over $100K, robo-advisors are worth it.

For smaller portfolios, manual tax loss harvesting in December is fine.

The One-Minute Action Plan

If you have a taxable brokerage account:

Option 1 (Automated):

1. Open a Betterment or Wealthfront account
2. Transfer your taxable investments
3. Turn on automatic tax loss harvesting
4. It happens in the background forever

Option 2 (Manual):

1. Review your portfolio every December 15
2. Identify positions down 5%+
3. Sell losers, buy similar alternatives
4. Track transactions in a spreadsheet
5. Report on taxes next April

Either way, you’re saving $1,000-5,000/year you’d otherwise give to the IRS.

Tax Loss Harvesting + Other Strategies

Stack tax loss harvesting with:

1. Backdoor Roth IRA contributions → $7,000/year tax-free growth
2. Solo 401k contributions (if self-employed) → $69,000/year tax-deferred
3. Remote work tax deductions → $1,500-3,000/year
4. 529 plan contributions → State tax deductions

Combined, these strategies save high earners $10,000-30,000/year in taxes.

The Bottom Line

Tax loss harvesting is the easiest tax optimization most investors never do.

The strategy:

• Sell losing investments
• Buy similar (not identical) replacements
• Use losses to offset gains or $3,000 of ordinary income
• Carry forward unused losses forever

The savings:

• $1,000-3,000/year for manual harvesters
• $2,000-6,000/year for automated (robo-advisors)

If you have $50K+ in a taxable brokerage account and you’re not tax loss harvesting, you’re giving the IRS free money.

Set a calendar reminder for December 15 every year. Review losing positions. Harvest losses.

Or hand it to a robo-advisor and let it happen automatically.

Either way, start this year. Every year you wait is another year of tax savings you’ll never get back.