Capital Loss Harvesting: What It Is and When It Actually Helps
How market losses can quietly work in your favor
Capital loss harvesting is a way to use investment losses strategically to reduce taxes, improve after-tax returns, and stay aligned with your long-term plan.
Market volatility can be uncomfortable, but it can also create planning opportunities. One of the most common is capital loss harvesting. It sounds technical, but at its core, it’s about using investment losses thoughtfully to reduce taxes over time.
Here’s what capital loss harvesting is, how it works, and when it makes sense.
What Is Capital Loss Harvesting?
Capital loss harvesting is the practice of selling an investment at a loss and using that loss to offset taxable gains.
Those losses can be used in a few ways:
To offset capital gains from selling other investments
To offset up to $3,000 of ordinary income each year
To be carried forward and used in future years if losses exceed gains
The goal isn’t to “lock in” losses forever. In most cases, the proceeds are reinvested into a similar investment so your overall portfolio stays aligned with your long-term plan.
Why Losses Can Still Be Useful
It’s natural to feel hesitant about selling something at a loss. But from a tax perspective, losses can be valuable.
For example:
If you sell an investment with a gain, harvested losses can reduce or eliminate the taxes owed
If you have a high-income year, losses can soften the tax impact
If you don’t need the losses immediately, they can be saved and used in future years when gains are higher
Used correctly, capital loss harvesting can improve after-tax returns without changing your long-term investment strategy.
Important Rules to Know
Capital loss harvesting comes with a few guardrails.
The most important is the wash sale rule. If you sell a security at a loss and buy the same or a “substantially identical” investment within 30 days before or after the sale, the loss is disallowed for tax purposes.
This is why harvesting is often paired with careful reinvestment. You want to maintain market exposure without violating the wash sale rules.
Losses also apply differently depending on the account. Capital loss harvesting only works in taxable brokerage accounts, not retirement accounts like IRAs or 401(k)s.
When Capital Loss Harvesting Makes Sense
Capital loss harvesting is most helpful when:
You have realized or expected capital gains
You’re in a higher tax bracket
You expect your income or gains to increase over time
You’re investing in taxable accounts and plan to stay invested long-term
It’s less impactful if your investments are mostly in retirement accounts or if your tax situation is relatively simple with few taxable gains.
Why This Is a Planning Tool, Not a Standalone Strategy
Capital loss harvesting works best when it’s part of a broader financial plan. Harvesting losses without considering cash flow, future tax rates, or long-term goals can create complexity without much benefit.
In practice, it’s about coordination:
Understanding when gains are likely to occur
Deciding when losses are most valuable
Making sure investment decisions still support your overall plan
The Bottom Line
Capital loss harvesting isn’t about timing the market or reacting emotionally to downturns. It’s about using the tax code thoughtfully while staying invested and focused on the long term.
When done intentionally, it can be a quiet but meaningful way to improve after-tax outcomes over time.