Tax-Loss Harvesting Strategy

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What You’ll Learn

1. ✅ Understand what tax-loss harvesting is and how it saves money
2. ✅ Identify opportunities to harvest losses in your portfolio
3. ✅ Execute tax-loss harvesting trades correctly
4. ✅ Avoid wash sale violations (critical IRS rule)
5. ✅ Carry forward losses to future tax years
6. ✅ Combine tax-loss harvesting with portfolio rebalancing
7. ✅ Calculate the real dollar value of tax savings

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What is Tax-Loss Harvesting?

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The Basics

• You sell Stock A for $10,000 profit (capital gain)
• You owe taxes: $10,000 × 20$2,000 tax bill
• Net profit: $10,000 -$2,000 = $8,000

• You sell Stock A for $10,000 profit (capital gain)
• You also sell Stock B for $10,000 loss (capital loss)
• Net capital gain: $10,000 -$10,000 = $0
• You owe taxes: $0
• Tax savings: $2,000!
• You immediately buy a similar (but not identical) stock to replace Stock B
• You stay invested while harvesting the tax benefit

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How It Works

• Stock bought at $100, now worth$70 = $30 loss per share

• Sell to realize the loss for tax purposes

• Buy a different but similar stock/ETF
• Maintain market exposure (stay invested)

• Report loss on tax return
• Offsets capital gains dollar-for-dollar
• Can also offset $3,000 of ordinary income per year
• Excess losses carry forward to future years

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Tax Rules You Must Know

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Rule #1: Capital Gains Offset

• Short-term = held <1 year
• Taxed as ordinary income (22-37% tax brackets)

• Long-term = held >1 year
• Taxed at preferential rates (0%, 15%, or 20%)

• Remaining short-term losses offset long-term gains
• Remaining long-term losses offset short-term gains

• Maximum $3,000 per year
• Reduces W-2 wages, interest income, etc.

• No expiration!
• Use in future years following same rules

• Short-term capital gains: $15,000 (from day trading)
• Long-term capital gains: $10,000 (from selling stock held 2 years)
• Harvested losses: $20,000 long-term

1. $20,000 long-term loss offsets$10,000 long-term gain → $0 long-term gain
2. Remaining $10,000 loss offsets$10,000 short-term gain → $0 short-term gain
3. Remaining $0, no ordinary income offset
4. Total capital gains: $0 (vs.$25,000 without harvesting)

• Short-term gains tax saved: $10,000 × 24$2,400
• Long-term gains tax saved: $10,000 × 15$1,500
• Total tax savings: $3,900!

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Rule #2: The Wash Sale Rule (CRITICAL!)

You cannot claim a tax loss if you buy a “substantially identical” security within 30 days before or after the sale.

• 30 days BEFORE the sale
• 30 days AFTER the sale
• Total: 61-day window

• Dec 1: Sell 100 shares VTI at a loss
• Dec 10: Buy 100 shares VTI (9 days later)
• Result: WASH SALE! Loss disallowed, no tax benefit

• Dec 1: Sell 100 shares VTI at a loss
• Dec 1: Buy 100 shares SCHB or ITOT (similar but not identical)
• Result: Loss allowed, stay invested, no wash sale

• Can’t sell VTI and buy VTI (obviously)
• Can’t sell Apple (AAPL) and buy Apple (same stock)

• VTI (Vanguard Total Market) and VT (Vanguard Total World) = Different (VT includes international)
• VTI and VXUS = Different (one is U.S., one is international)

• VTI (Total Market) → SCHB (Schwab Total Market) = Different providers, OK!
• VTI (Total Market) → VOO (S&P 500) = Different index, OK!
• SPY (S&P 500 ETF) → IVV (S&P 500 ETF) = Different providers but SAME index, risky

• Apple → Microsoft = Different companies, OK
• Coca-Cola → PepsiCo = Different companies, OK
• ExxonMobil → Chevron = Different companies, OK

• BND (Total Bond) → AGG (Aggregate Bond) = Similar but different, usually OK

Hey Money Monty, I want to harvest a tax loss on [TICKER].

What's a good replacement that:
1. Is similar enough to maintain my market exposure
2. Is different enough to avoid wash sale
3. Has low expense ratio

I need to avoid the wash sale rule!

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Rule #3: Loss Limitation ($3,000 per year)

• Capital gains: $5,000
• Capital losses: $25,000
• Net capital loss: $20,000

• $5,000 loss offsets$5,000 gains → $0 capital gains
• $3,000 loss offsets ordinary income (W-2 wages)
• Remaining $12,000 loss → Carries forward to next year

• You have $12,000 loss carryforward
• New capital gains in 2025: $8,000
• $8,000 of carryforward offsets$8,000 gains → $0 gains
• Remaining $4,000 carryforward available
• Can use $3,000 against ordinary income
• $1,000 carries to 2026

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When to Harvest Losses

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Scenario #1: Market Crash / Correction

• Market down 20-30% for the year
• Many positions showing significant losses
• Perfect time to harvest

1. Identify ALL positions with losses
2. Harvest as many as possible (up to your needs)
3. Immediately replace with similar ETFs
4. Use harvested losses against 2022 gains (or carry forward)

• $20,000-$50,000 in losses (can offset gains for years!)

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Scenario #2: Rebalancing

• Sell bonds, buy stocks (could trigger gains on bonds)

• Sell losing stock positions (harvest losses)
• Immediately buy different stock ETFs
• Use harvested losses to offset bond gains
• Result: Rebalanced AND reduced taxes!

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Scenario #3: End-of-Year Planning

• Know your gains for the year
• Can calculate how much loss to harvest
• Offsets gains realized earlier in the year

1. November: Review year-to-date capital gains
2. November: Identify positions with losses
3. December 1-15: Execute tax-loss harvesting trades
4. December 31: Ensure 30-day wash sale window doesn’t cross into new year (if buying back original)

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Scenario #4: Taking Profits

• $15,000 gain × 20$3,000 tax

• Identify stocks with $15,000 in losses
• Sell those too (harvest losses)
• Replace with similar stocks
• Net capital gain: $15,000 -$15,000 = $0
• Tax savings: $3,000!

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How to Execute Tax-Loss Harvesting

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Step 1: Identify Loss Opportunities

1. Go to Accounts → Positions
2. Look for “Unrealized Gain/Loss” column
3. Sort by “Unrealized Loss” (most negative first)
4. Identify positions down 10%+

1. Portfolio → Holdings
2. View “Gain/Loss” column
3. Filter for losses
4. Check individual lots if needed (for specific lot harvesting)

1. View Holdings
2. Look for red numbers (losses)
3. Calculate loss amount

1. Portfolio → Positions
2. “Gain/Loss” column
3. Use “Tax Loss Harvesting Tool” (if available)

Hey Money Monty, help me identify tax-loss harvesting opportunities:

My current positions with losses:
- [TICKER]: Bought at $[price], now $[current price], Loss: $[amount]
- [TICKER]: Bought at $[price], now $[current price], Loss: $[amount]
- [TICKER]: Bought at $[price], now $[current price], Loss: $[amount]

Which losses should I prioritize harvesting? And what are good replacement securities to avoid wash sales?

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Step 2: Calculate How Much Loss You Need

• How much capital gains did I realize this year? (Check 1099-B from last year or YTD trades)
• Do I have gains I plan to realize soon? (selling appreciated stock)
• Do I want to offset ordinary income? (up to $3,000)

• Realized gains so far: $10,000
• Planning to sell Apple (will realize $8,000 gain)
• Total gains: $18,000

• Identify positions with $21,000 in total losses
• Harvest those

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Step 3: Choose Replacement Securities

Hey Money Monty, I need to harvest a tax loss on [TICKER] (down $[amount]).

What's a good replacement stock/ETF that:
1. Has similar exposure (sector, market cap, geography)
2. Is different enough to avoid wash sale
3. Ideally has lower expense ratio or better performance history

Give me 2-3 options to choose from.

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Step 4: Execute the Trades (Same Day!)

1. Go to position in brokerage
2. Click “Sell”
3. Enter full position (or amount you want to harvest)
4. Order type: Market order (immediate execution)
5. Submit order
6. Document: Date, ticker, shares, loss amount

1. Immediately (within minutes) search for replacement ticker
2. Click “Buy”
3. Enter dollar amount (same as sale proceeds) OR calculated shares
4. Order type: Market order
5. Submit order
6. Document: Date, ticker, shares, cost

• Sell 100 shares VTI at $220 =$22,000 proceeds
• Cost basis was $250/share =$25,000
• Loss harvested: $3,000

• Buy $22,000 of SCHB (Schwab Total Market)
• At $50/share = 440 shares
• Now have SCHB instead of VTI (same exposure, no wash sale)

• Stay invested in total market (just different ETF)
• Harvested $3,000 loss for taxes
• Can offset $3,000 in gains or ordinary income

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Step 5: Track for Wash Sale Period

• ❌ Buy back the original security (VTI in example above)
• ❌ Have dividend reinvestment buy it (turn off DRIP if applicable)
• ❌ Buy it in another account (IRA, 401k, spouse’s account)

• ✅ Hold the replacement security (SCHB)
• ✅ Buy other different securities
• ✅ Sell the replacement if needed (independent transaction)

• You CAN buy back the original if you prefer
• Wash sale window has closed
• Tax loss is safe

• Set reminder for 31 days after sale
• Note: “Wash sale period ends, can buy [original ticker] if desired”

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Step 6: Document for Tax Return

• Date of sale (losing position)
• Shares sold
• Sale price
• Cost basis
• Loss amount
• Date of purchase (replacement)
• Replacement ticker

• Form 1099-B (capital gains/losses) in January
• Shows all sales for the year
• Includes whether gain/loss is short-term or long-term

• Report all capital gains and losses
• Losses will offset gains automatically
• Up to $3,000 excess loss offsets ordinary income
• Remaining losses carry forward to next year (tracked on Schedule D)

• TurboTax, H&R Block, etc. guide you through
• Or hire CPA for complex situations

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Advanced Tax-Loss Harvesting Strategies

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Strategy #1: Specific Lot Identification

• Lot 1: 100 shares at $100/share (now worth$200) = $10,000 gain
• Lot 2: 100 shares at $180/share (now worth$200) = $2,000 gain
• Lot 3: 100 shares at $220/share (now worth$200) = $2,000 LOSS

• Specify “Sell Lot 3 only” (100 shares at $220 cost basis)
• Harvest $2,000 loss
• Keep Lots 1 and 2 (let winners run)

1. When selling, choose “Specific Shares” instead of “First In, First Out”
2. Select which lots to sell (Lot 3)

1. Select “Specific Lot” when placing trade
2. Choose lots with losses

• Not available (uses FIFO automatically) - limitation!

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Strategy #2: Layering Losses Over Time

• You can only use $3,000/year against ordinary income
• Harvesting $50,000 loss might take 10+ years to fully utilize
• Better to harvest $10-15k/year as needed

• Harvest $10,000 loss
• Offset $7,000 in gains +$3,000 ordinary income
• Fully utilized

• Harvest another $12,000 loss
• Offset $9,000 in gains +$3,000 ordinary income
• Fully utilized

• Harvest $15,000 loss
• And so on…

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Strategy #3: Pair Selling

1. Sell Apple: +$20,000 gain
2. Harvest losses on Tesla, Amazon, etc.: -$20,000 loss
3. Net capital gain: $0
4. Tax owed: $0

• Took profits on Apple (de-risked)
• Stayed invested (bought replacements for harvested positions)
• Paid ZERO capital gains tax

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Strategy #4: Direct Indexing (Advanced/High Net Worth)

• Can only harvest loss if entire SPY is down

• If Apple is down but Microsoft is up, harvest Apple loss
• Still maintain S&P 500 exposure overall
• Many micro-harvesting opportunities

• Can harvest $10k-$30k annually even in UP markets
• More tax alpha (extra return from tax savings)

• Requires $100k-$500k+ portfolio
• Complex to manage (usually use service like Wealthfront, Betterment, Parametric)
• Higher trading costs

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Common Tax-Loss Harvesting Mistakes

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Mistake #1: Wash Sale Violation

• Dec 5: Sell VTI at loss
• Dec 20: “Market is recovering, I want VTI back!”
• Buy VTI (only 15 days later)
• WASH SALE! Loss disallowed

• Wait 31 days
• OR buy different fund permanently
• OR accept replacement is good enough

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Mistake #2: Forgetting About Other Accounts

• Dec 5: Sell VTI in taxable brokerage (harvest loss)
• Dec 10: Your 401k auto-buys VTI (employer match + contributions)
• WASH SALE! Loss disallowed

• Your IRAs (Traditional, Roth)
• Your 401(k)
• Spouse’s accounts
• Joint accounts

• Check all accounts before harvesting
• Pause 401k contributions temporarily if necessary
• Use different funds in retirement accounts

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Mistake #3: Harvesting Losses You Don’t Need

• Can only use $5,000 +$3,000 = $8,000 this year
• Remaining $42,000 carries forward
• Might take 10+ years to use (opportunity cost of trading fees, time)

• Only harvest what you can use (this year + $3,000)
• Save other loss opportunities for future years

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Mistake #4: Not Replacing Immediately

• Market rallies during your “out of market” time
• Miss 5-10% gain in days

• March 20: Sell stocks at bottom (harvest losses)
• “I’ll wait for better entry point”
• March 23-April: Market rallies 30%+
• You missed entire recovery

• SAME DAY replacement purchase
• Within minutes or hours, not days/weeks

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Mistake #5: Selling Long-Term for Short-Term Replacement

• Stock held 2 years (long-term holding)
• Generates long-term loss (offsets long-term gains at 15-20% tax)

• Replacement stock
• Sell it 6 months later (short-term gain)
• Taxed at ordinary income (22-37%)

• You created a short-term gain (higher tax) by selling long-term asset
• Tax inefficient!

• Plan to hold replacements long-term too (1+ year)
• Match holding periods when possible

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Tax-Loss Harvesting Calculator

Tax Savings = (Loss Harvested × Your Tax Rate)

• Harvested loss: $15,000
• Offset capital gains: $15,000
• Your capital gains tax rate: 15% (long-term)

• $15,000 × 15$2,250 saved

• Harvested loss: $10,000
• Offset capital gains: $0
• Offset ordinary income: $3,000 (max allowed)
• Carryforward: $7,000 (for future years)
• Your ordinary income tax rate: 24%

• $3,000 × 24$720 saved

• $7,000 × 15$1,050

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Using Sage for Tax Planning

Hey Sage, help me plan my tax-loss harvesting for this year:

MY SITUATION:
- Capital gains realized so far: $[amount]
- Planned future sales (gains): $[amount]
- Marginal tax bracket: [%]
- Capital gains tax rate: [15% or 20%]

MY POSITIONS WITH LOSSES:
- [TICKER]: Down $[amount] (held [X] months)
- [TICKER]: Down $[amount] (held [X] months)
- [TICKER]: Down $[amount] (held [X] months)

QUESTIONS:
1. How much loss should I harvest this year?
2. Which positions should I prioritize (biggest losses? short-term vs long-term?)
3. What's my estimated tax savings?
4. Should I harvest more than I need (for future carryforward)?
5. Good replacement securities for each?

Hey Sage, I'm planning a tax-loss harvest and want to avoid wash sales:

SALE PLAN:
- Sell [TICKER] on [date] to harvest $[amount] loss

OTHER HOLDINGS:
- I also own [list other tickers in all accounts]

QUESTIONS:
1. Do any of my other holdings qualify as "substantially identical" (wash sale risk)?
2. Do I need to sell those too, or am I safe?
3. What's a good replacement that definitely avoids wash sale?
4. Can I buy back the original after 30 days, or should I stick with replacement?

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Success Checklist

• Understood how tax-loss harvesting saves money (offset gains + $3,000 income)
• Learned the wash sale rule (30 days before and after = 61-day window)
• Identified positions in your portfolio with unrealized losses
• Calculated how much loss you need to harvest this year
• Found appropriate replacement securities (avoid wash sale)
• Executed (or planned) your first tax-loss harvest trade
• Set up tracking for 30-day wash sale period
• Documented trades for tax return preparation
• Calculated estimated tax savings from harvesting
• Scheduled annual tax-loss harvesting review (November-December)

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What’s Next?

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Related Workflows:

• Asset Location Optimization - Which accounts for which assets
• Portfolio Rebalancing - Combine with harvesting
• Monthly Portfolio Review - Track loss opportunities
• Multi-Account Portfolio Management - Coordinate across accounts

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Continue Learning:

• Read IRS Pub 550 (Investment Income and Expenses)
• Use tax software with capital gains tracking (TurboTax Premier, H&R Block Premium)
• Consider hiring CPA if portfolio >$500k or complex situation
• Join r/tax or r/personalfinance for tax strategy discussions

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Take Action:

• November: Review year-to-date gains
• December 1-15: Execute tax-loss harvesting trades
• January: Receive 1099-B from broker
• Tax season: Report on Schedule D and Form 8949