Tax-loss harvesting

Tax-loss harvesting is the practice of selling an investment that has fallen in value to realize a capital loss, which can be used to offset capital gains elsewhere in a portfolio and, up to a limit, ordinary income, reducing an investor's current tax bill. The proceeds are typically reinvested in a similar, but not substantially identical, asset to keep the portfolio's overall exposure roughly unchanged.

In the United States, the wash-sale rule disallows the tax loss if the same or a "substantially identical" security is repurchased within 30 days before or after the sale, which is why harvesting typically swaps into a correlated but distinct fund rather than buying back the original holding; rules on repurchase timing and what counts as substantially identical vary by jurisdiction. This is a tax-driven trade layered on top of ordinary portfolio rebalancing, not a substitute for it.

Harvested losses can typically be carried forward to offset gains in future years where current-year gains are insufficient, subject to local tax rules. The technique is widely automated by robo-advisors as part of a broader asset allocation strategy. A common pitfall is harvesting losses without regard to the wash-sale window, which forfeits the deduction, or losing sight of the original investment thesis by drifting into a materially different replacement asset.