Tax-loss harvesting without the wash-sale trap

When an investment in a taxable account falls below what you paid, selling it “harvests” the loss. The loss offsets capital gains, then up to $3,000 of ordinary income a year, and any remainder carries forward to future years. Done well, it lowers today’s tax without changing your long-term plan.

Done carelessly, the loss disappears.

The wash-sale rule in one sentence

If you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is disallowed for now.

The disallowed loss isn’t gone forever in most cases. It’s added to the cost basis of the replacement shares, so you’ll get it back when you sell those. But you lose the benefit this year, which was the point.

Where people trip

• Automatic reinvestment. A dividend reinvested into the same fund within 30 days counts as a purchase.

• Other accounts. Buying the same fund in your IRA within the window triggers the rule, and the loss is permanently lost, because an IRA has no cost basis to add it to.

• Your spouse’s accounts. Purchases by your spouse count too.

• Buying first. The window runs 30 days *before* the sale as well as after.

How to harvest cleanly

1. Swap, don’t wait. Sell the losing fund and buy a similar, but not substantially identical, fund right away. For example, a different index covering a similar market. You stay invested; the loss counts.

2. Turn off reinvestment in that holding for the window.

3. Check every household account, including IRAs, 401(k)s and your spouse’s, before and after the sale.

4. Keep the swap for 31 days before switching back, if you want to.

When harvesting isn’t worth it

A harvested loss lowers your basis in the replacement, which means a larger gain later. It pays off most when the loss offsets gains taxed at higher rates now, when you expect to be in a lower bracket later, or when the shares may be held until death and receive a stepped-up basis. For small losses, trading costs and complexity can outweigh the benefit.

How we handle it

We look for harvesting opportunities at every quarterly review, not just in December. Every trade is checked against all of your household’s accounts for wash sales, and the losses are tracked through to your return, which our team prepares.