How to Calculate Tax-Loss Harvesting Savings

Tax-loss harvesting (TLH) is a strategy where you sell investments at a loss to offset capital gains and reduce your tax bill. Done correctly, it can save thousands of dollars annually without meaningfully changing your portfolio's long-term performance.

The Basic Mechanics

  1. Sell an investment that has declined in value
  2. Realize the capital loss
  3. Use the loss to offset capital gains (dollar for dollar)
  4. If losses exceed gains, deduct up to $3,000 of ordinary income
  5. Carry forward any remaining losses to future years

Step-by-Step Calculation

Your situation:

  • Realized gains from stock sales: $15,000
  • Investment A current value: $8,000; original cost: $13,000 (unrealized loss of $5,000)

After TLH:

  • Net gain: $15,000 βˆ’ $5,000 = $10,000
  • Tax savings at 15% long-term rate: $5,000 Γ— 0.15 = $750 saved

If losses exceed gains:

  • Gains: $2,000
  • Harvested losses: $8,000
  • Net: βˆ’$6,000
  • Applied against gains: βˆ’$2,000 (zeroes out gains)
  • Deducted from ordinary income: βˆ’$3,000 (the IRS maximum)
  • Carried forward to future years: $1,000

The Wash-Sale Rule

The IRS disallows the loss deduction if you buy a "substantially identical" security within 30 days before or after the sale. To maintain market exposure while avoiding the wash-sale rule, you can immediately reinvest in a similar (but not identical) ETF or fundβ€”for example, selling one S&P 500 ETF and buying a different one.

When TLH Makes the Most Sense

  • You have significant capital gains in a taxable account
  • You're in the 15% or higher long-term capital gains bracket
  • You have investments with meaningful unrealized losses

Use our capital gains calculator to estimate your annual tax-loss harvesting opportunity.