Tax glossary

Capital Loss & Tax-Loss Harvesting

Capital Loss & Tax-Loss Harvesting — what it means, how it works, and a real example, explained without the jargon.

What is Capital Loss & Tax-Loss Harvesting?

A capital loss is what you have when you sell an asset for less than you paid. Used deliberately, losses can lower your tax bill.

How it works

Losses first offset your capital gains dollar for dollar. If losses exceed gains, up to $3,000 of the excess can offset ordinary income each year, and anything left carries forward. "Tax-loss harvesting" is intentionally selling losers to bank those offsets.

A quick example

You have a $10,000 gain and sell a separate loser for a $10,000 loss. They cancel out, and you owe no capital-gains tax on the gain.

What people get wrong

Watch the wash-sale rule when harvesting: buy back the same security within 30 days and the IRS disallows the loss. Wait it out or buy something similar-but-not-identical.

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Frequently asked questions

What does Capital Loss & Tax-Loss Harvesting mean?

A capital loss is what you have when you sell an asset for less than you paid. Used deliberately, losses can lower your tax bill.

How does Capital Loss & Tax-Loss Harvesting work?

Losses first offset your capital gains dollar for dollar. If losses exceed gains, up to $3,000 of the excess can offset ordinary income each year, and anything left carries forward. "Tax-loss harvesting" is intentionally selling losers to bank those offsets.

What's the most common mistake with capital loss & tax-loss harvesting?

Watch the wash-sale rule when harvesting: buy back the same security within 30 days and the IRS disallows the loss. Wait it out or buy something similar-but-not-identical.