Tax-loss harvesting: the legal way to make a market dip less painful

A paper loss is not a real loss, unless you make it one

You bought a stock at $80, it's at $60, and you're down $2,000 on paper. The loss only becomes real when you sell.

Selling a losing position feels like admitting failure. It can also be the smartest move on the table, because a realized capital loss reduces your tax bill.

How the deduction works

Realized losses first cancel your capital gains, dollar for dollar. No gains to cancel? Then up to $3,000 of the loss can reduce your ordinary income that year, saving you tax at your ordinary rate, which is usually higher than the capital gains rate.

The leftover carries forward to future years indefinitely.

The Tax-Loss Harvesting calculator works through your exact numbers: how much of the loss offsets gains, how much hits the $3,000 income slot, and what carries over.

The wash sale rule is the whole game

The IRS closed an obvious loophole years ago. If you sell a security at a loss and buy it back within 30 days before or after the sale, the loss is disallowed. The wash sale rule means you can't have your deduction and hold your position.

Strategy: sell the loser, wait 31 days, buy back, or buy a similar (but not identical) fund instead. Index fund to a different index fund, one S&P fund to another with different holdings, and the loss generally sticks while your market exposure barely moves.

Why the $3,000 slot is worth fighting for

Harvest $15,000 of losses with $10,000 of gains against them, and $3,000 of losses gets used against your ordinary income. At a 24% rate, that's $720 of federal tax saved, plus whatever your state charges, on a move that took about five minutes.

That's not life-changing money in a year. It compounds over decades, though, because every year you can refill that $3,000 slot. Run the numbers and see how close your tax software came to showing you this for free.