Lesson 1 of 5
Tax-loss harvesting: turn market drops into tax savings
Sell a losing position, buy a similar (not identical) fund, and deduct the loss against gains or $3,000 of ordinary income.
Lesson video
What tax-loss harvesting (TLH) is
TLH means selling an investment at a loss specifically to realise that loss for tax purposes. The loss offsets capital gains dollar-for-dollar with no limit. If losses exceed gains, you can deduct up to $3,000/year ($1,500 married filing separately) against ordinary income. Unused losses carry forward indefinitely.
This only works in taxable brokerage accounts. Losses inside tax-advantaged accounts (401(k), IRA, Individual Savings Account (ISA), Tax-Free Savings Account (TFSA)) have no tax impact because those accounts are already tax-sheltered.
The wash sale rule (IRS Section 1091)
You cannot sell a stock at a loss and buy a "substantially identical" security within 30 days before or after the sale. The window is 61 days total (30 before + sale day + 30 after).
If you violate it, the loss is disallowed. It is NOT permanently lost; instead, it gets added to the cost basis of the replacement security, deferring the benefit until you eventually sell.
Critical traps: - The rule applies across ALL your accounts (taxable + IRA + spouse's accounts) - Buying in your IRA within 30 days permanently loses the loss (no basis adjustment in an IRA) - The rule does not reset on January 1st. A December 20 sale + January 10 repurchase violates it - As of 2026, cryptocurrency is NOT subject to the wash sale rule (crypto is property, not a security)
Safe TLH swap pairs (not substantially identical)
| Sell | Buy instead | Why it is safe |
|---|---|---|
| VOO (S&P 500) | VTI (Total US Market) | Different index, different holdings |
| VTI (Total US Market) | ITOT (iShares Total Market) | Same index but different issuer may still be substantially identical, use VXUS or a different index to be safe |
| VXUS (Intl ex-US) | IXUS (iShares Intl) | Different issuer, similar exposure |
| BND (Total Bond) | AGG (iShares Aggregate Bond) | Different issuer, very similar |
Different Exchange-Traded Funds (ETFs) tracking the SAME index (e.g. VOO and IVV, both S&P 500) may be considered "substantially identical" by the IRS. The safest swap is between different indexes: sell S&P 500, buy Total Market. The IRS has never published clear guidelines, so conservative is better than clever
“If I could give myself advice back then: just buy the S and P. Not the stock picking stuff.”
Tax-loss harvesting works best with broad index funds because there are always similar (not identical) alternatives to swap into.
Knowledge check
You sell VOO at a $5,000 loss on December 15. On January 5 (21 days later), you buy IVV (also an S&P 500 Exchange-Traded Fund (ETF)). Is the loss deductible?
“If one person can do it, you can be two. If none have done it, you can be one.”
Applied to: Tax-loss harvesting: turn market drops into tax sa
Common questions about tax-loss harvesting: turn market drops i
Getting started with tax-loss harvesting: turn market dr
Understand your current position
Use the calculator on the homepage to see your take-home pay and tax position before making changes.
Take the first small step
You do not need to do everything at once. Pick the single action from this lesson that has the highest impact and do it this week.
Review after one month
Check the effect on your payslip or bank statement. Adjust if needed. Progress, not perfection.
Use the Wealthy Employee calculator to see how tax-loss harvesting: turn market drops i affects your specific take-home pay and tax position.
Knowledge check
Based on what you learned about tax-loss harvesting: turn market dr, which statement is most accurate?