Tax Loss Harvesting Calculator

In the world of sophisticated investing, it's not just about what you make—it's about what you keep. Tax Loss Harvestingis a legitimate strategy that allows you to "rebate" a portion of your investment losses from the IRS by using them to offset your taxable gains.

While seeing "red" in your portfolio is never fun, these unrealized losses are actually a valuable tax asset. By "realizing" those losses strategically, you can effectively lower your tax bill, keep more money compounding in the market, and turn a market downturn into a long-term financial advantage.

How Tax Loss Harvesting Actually Works

When an investment's current market value falls below its cost basis(the price you paid, including commissions), you have an unrealized loss. If you sell that investment, that loss becomes "realized."

Once realized, that loss can be used as a deduction. The IRS allows you to use your realized losses to cancel out realized capital gains you've made on other investments. If you made $10,000 from selling a stock at a gain, but also realized a $10,000 loss on another, your net taxable gain for the year is $0.

Crucial: Understanding the Wash Sale Rule

You cannot simply sell a stock today to claim the loss and buy it back five minutes later. The IRS Wash Sale Ruledictates that if you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or afterthe sale, your loss is disallowed for tax purposes.

This means you must be out of the position for at least 31 days to successfully "harvest" the loss.Example:If you sell the Vanguard S&P 500 ETF (VOO) for a loss, you can't immediately buy the iShares S&P 500 ETF (IVV) because the IRS may view them as substantially identical. However, you could potentially buy a Total Stock Market ETF (VTI) which is highly correlated but not identical.

Short-Term vs. Long-Term: The Netting Rule

The IRS groups your transactions into two buckets:

• Short-Term: Assets held for one year or less. These are taxed at your ordinary income tax rates (up to 37%).
• Long-Term: Assets held for more than one year. These are taxed at lower capital gains rates (0%, 15%, or 20%).

When harvesting, you first offset losses against gains of the same type (short-term losses against short-term gains). If you have excess losses in one bucket, they can then be used to offset gains in the other bucket.

Tax Loss Carryforwards: Losses That Never Expire

If you have a particularly bad year and your losses exceed both your gains and the $3,000 income offset, you don't lose the "unused" part of your loss. You can **carry it forward** to future tax years indefinitely. Many investors use large losses from a market crash to offset their gains for the next 5-10 years.

Should You Always Harvest?

While saving on taxes is great, harvesting isn't always the right move. When you sell and buy back later, you areresetting your cost basisto a lower level. This means when you eventually sell at a profit years from now, your gain will be larger, and you'll pay more tax then.

Essentially, tax loss harvesting is often a tax deferralstrategy. You save $1,000 in taxes today so you can keep that $1,000 invested and growing for 20 years, even if you eventually have to pay it back. The "win" is the time-value of that money.

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