Tax-loss harvesting (TLH) is a tax optimization strategy where you sell investments that are trading below your purchase price to realize capital losses, then use those losses to offset capital gains and reduce your tax bill. The core idea: you are converting paper losses into real tax savings while maintaining your desired market exposure by reinvesting in similar (but not identical) assets.

47 steps across 12 sections

1. Review Your Portfolio for Unrealized Losses

Individual stocks that have declined
ETFs or mutual funds in losing positions
Recent purchases that have dropped (short-term losses are more valuable — see below)
Multiple tax lots of the same security (some lots may be at a loss even if the overall position is up)

2. Calculate Your Realized Capital Gains for the Year

Stock or ETF sales at a profit
RSU vesting and subsequent sales
Mutual fund capital gains distributions (even if reinvested)
Real estate sales, business exits, or other asset dispositions
Cryptocurrency sales at a profit

3. Match Losses to Gains (Netting Rules)

Short-term losses first offset short-term gains (highest tax benefit, since short-term gains are taxed at ordinary income rates up to 37%)
Long-term losses first offset long-term gains (lower benefit, since long-term gains are taxed at 0%-20%)
If one category has net losses and the other has net gains, they offset each other
Remaining net losses can offset up to $3,000 of ordinary income ($1,500 if married filing separately)
Any remaining losses carry forward indefinitely to future tax years

4. Sell the Losing Position(s)

Use specific lot identification to maximize the loss
Consider selling the entire position or just the highest-cost lots
Document the sale date — this starts the 61-day wash sale window
Settlement date (T+1 for stocks) is what matters for year-end harvesting

5. Report on Your Tax Return

Losses are reported on Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets)
Your broker provides Form 1099-B with cost basis and proceeds
Track carryforward losses for future years on Schedule D, Line 21

6. The Power of Carryforward

There is no limit on how much you can carry forward
There is no expiration on carryforward losses — they persist until used
Carryforward losses maintain their character (short-term vs. long-term)
Carryforward losses are used in the same netting order as current-year losses
At death , unused carryforward losses are lost — they do not transfer to heirs

7. Example

$20,000 offsets the gains (no capital gains tax)
$3,000 offsets ordinary income (saves $720 at 24% bracket, or $1,110 at 37%)
$27,000 carries forward to next year and beyond

8. Why the $3,000 Limit Matters Less Than You Think

10 years of carryforward = $30,000 of ordinary income offset
At a 32% marginal rate, that is $9,600 in tax savings
Plus the immediate capital gains offset (which has NO dollar limit)

9. The 61-Day Window

30 days before the sale date
The sale date itself
30 days after the sale date

10. Cross-Account Application (CRITICAL)

Multiple brokerage accounts at different firms
Your spouse's accounts (for joint filers)
Your IRA or Roth IRA (with devastating consequences — see below)
Your 401(k) — debatable; see note below

11. The IRA Wash Sale Trap (Permanent Loss)

You sell Stock X in your taxable account for a $10,000 loss
Within 30 days, you buy Stock X in your IRA
The $10,000 loss is disallowed — you cannot claim it this year
The $10,000 is NOT added to your IRA basis — it is permanently lost
When you eventually withdraw from your IRA, you will pay tax on that $10,000 as ordinary income

12. Strategic Implications

Prioritize harvesting short-term losses if you have short-term gains to offset
If you have both short-term and long-term losses available, harvest the short-term losses first (they expire and become long-term after the 1-year holding period)
Consider the netting order: losses first offset gains of the same type, then cross-type

Tax-loss harvesting