Let’s talk about one of the most underused tax strategies in personal finance—tax-loss harvesting. Yes, I know. The name alone sounds like something a high-net-worth client talks about with their CPA in a wood-paneled office while sipping coffee from a tiny porcelain cup. But here's the real deal: tax-loss harvesting isn’t just for the wealthy, and you don’t need a financial advisor on retainer to benefit from it.
If you’ve started dabbling in investing—maybe through a brokerage app, a DIY index fund portfolio, or even a robo-advisor—this strategy could help you keep more of your hard-earned money, even when the market dips. And let’s be honest: the market will dip. That’s not failure. That’s investing.
This guide is designed to demystify tax-loss harvesting in plain English. I’ll break down what it is, how it works, why it’s not just a tool for millionaires, and how you can start using it—even if you’re investing with modest amounts. No jargon. No unnecessary complexity. Just smart, savvy, money-minded advice that makes this strategy accessible to real people with real budgets.
What Is Tax-Loss Harvesting?
In its simplest form, tax-loss harvesting is a strategy where you sell an investment at a loss to reduce your taxable gains. You then reinvest that money into a similar (but not identical) investment to keep your portfolio balanced and on track.
Think of it like pruning a plant. You’re cutting back the dead parts (investments that lost value), so the rest can thrive—and you’ll save money on taxes in the process.
Here’s the basic flow:
- You sell an investment in your taxable account that’s lost value.
- You record that loss, which can be used to offset any gains you made elsewhere.
- If your losses exceed your gains, you can deduct up to $3,000 against your regular income (for individuals).
- You reinvest the money into a similar investment so your long-term strategy stays intact.
The catch? You have to follow IRS rules to avoid tripping over the wash sale rule—but we’ll cover that in a minute.
Why It’s Not Just for the Wealthy
The idea that tax-loss harvesting is only for the rich? That’s an outdated myth.
Yes, wealthy investors with complicated portfolios often use this strategy because they have more gains to offset. But the truth is: anyone with a taxable investment account can benefit—especially in a down market.
Here’s why it’s worth your attention:
- You don’t need massive capital gains to make it worthwhile. Even modest gains can be offset, reducing your tax bill.
- You can use it to your advantage even in early-stage investing—when every dollar counts more.
- Many robo-advisors now automate it, making it accessible without much effort.
- You can carry forward unused losses, so even if you don’t use them all this year, they’ll help in future years.
Translation? If you’re investing $1,000 or $10,000 and trying to be smart with taxes—this strategy belongs in your toolbelt.
Taxable vs. Tax-Advantaged Accounts: Know the Difference
Before we go any further, let’s clear up an important distinction.
Tax-loss harvesting only applies to taxable accounts. These are your regular brokerage accounts—where dividends, capital gains, and losses are reportable to the IRS each year.
It does not apply to:
- Roth IRAs
- Traditional IRAs
- 401(k)s
- HSAs
Those accounts are either tax-deferred or tax-free, so losses inside them don’t affect your taxes.
So if your only investments are inside a 401(k), you can skip this strategy for now. But once you open a brokerage account (even one with just a few hundred dollars), this becomes relevant.
How It Worked for Me
A few years ago, I opened a modest brokerage account and started dollar-cost averaging into a handful of ETFs. One of them took a dip—about 12%—after a rough earnings season across the industry.
Old me would’ve just waited it out.
But money-smart me did the math: I could sell that ETF at a loss, buy a similar ETF (one that tracked the same sector but had a different structure), and capture a $400 capital loss—without changing my investing plan.
That $400 offset part of my gains from selling another asset earlier that year. Result? I lowered my tax bill and stayed on track with my asset allocation.
And I didn’t need a financial planner to make that decision—I just needed to know the rules.
How Much Can You Actually Save?
Let’s break it down with a quick example.
Say you sold stock in a company and made a $2,000 profit. That’s a capital gain, and unless it’s in a tax-advantaged account, the IRS wants a piece of it.
Now, let’s say you also sell another investment that lost $2,000.
What happens? You’ve just canceled out your gain.
Your tax bill on that profit = $0.
Still have more losses? You can deduct up to $3,000 per year from your ordinary income (like your job income). And if you have even more losses than that, you can roll the remainder forward into future tax years.
Even if your tax rate is on the lower side—say, 12% or 22%—that’s real money you’re saving.
The Wash Sale Rule: What You Need to Know
Here’s the IRS fine print: if you sell a security at a loss, you can’t buy the same or a “substantially identical” one within 30 days before or after the sale.
Do that, and your loss is disqualified. That’s called a wash sale.
How do you avoid it?
- Don’t repurchase the exact same investment (same stock, same ETF) within the 30-day window.
- Instead, buy a similar—but not identical—investment. For example, if you sell a Vanguard Total Stock Market ETF (VTI), you might buy a different broad-market ETF like SCHB or ITOT.
The idea is to keep your strategy intact while making sure the IRS can’t say you’re just gaming the system.
Some robo-advisors (like Betterment and Wealthfront) automatically avoid wash sales by using alternate ETFs. But if you’re DIYing, make sure to document what you sold and what you bought, and give that 30-day buffer room.
So, Should You Use Tax-Loss Harvesting?
Here’s the litmus test:
- Do you have a taxable investment account?
- Do you have any investments currently showing a loss?
- Have you realized any capital gains this year—or do you expect to?
- Are you okay swapping one ETF or stock for another to preserve your strategy?
If the answer to those questions is “yes,” or even “maybe,” it’s worth considering.
Even small-scale investors can benefit—especially when markets are volatile. And let’s be honest: if you’re trying to stretch your dollars, a few hundred saved on taxes is a pretty sweet win.
Savings Success!
- Review your portfolio quarterly. Check for underperforming investments in your taxable accounts. Losses are only usable if realized before the tax year ends.
- Track cost basis accurately. Know what you paid for each investment so you can identify gains and losses clearly.
- Avoid wash sales. Wait at least 31 days before rebuying the same investment—or choose a similar alternative instead.
- Coordinate with your overall tax strategy. Harvested losses can offset capital gains and reduce taxable income up to $3,000 per year.
- Document everything. Keep records of your trades, especially the dates and the amount of loss harvested—it’ll help at tax time (and avoid costly errors).
A Smart Tax Strategy Doesn’t Require a Million-Dollar Portfolio
If there’s one thing I hope you take away from this article, it’s this:
You don’t need to be rich to use rich-person strategies. You just need to be informed and intentional.
Tax-loss harvesting is a perfectly legal, IRS-approved move that can help you keep more of what you earn—especially in years when the market isn’t working in your favor. It doesn’t require a ton of effort. And it could shave hundreds (or more) off your tax bill.
So if you’re investing in a taxable account—even a little—and you’re looking to be smarter with your money, take a look at your portfolio. You might just have a loss that could work for you.
And hey, that’s a win in my book.
