Tax Loss Harvesting Calculator: How to Turn Investment Losses Into Tax Savings

When an investment falls below what you paid for it, you have a paper loss. If you sell, the loss becomes real and usable against your taxes.

Tax loss harvesting means selling positions at a loss intentionally to generate tax deductions, then reinvesting the proceeds in similar (but not identical) assets to maintain market exposure. You capture the tax benefit without leaving the market.

How the Deduction Works

Investment losses can offset:

• Short-term capital gains (taxed as ordinary income)
• Long-term capital gains (taxed at 0%, 15%, or 20%)
• Up to $3,000 of ordinary income per year

Losses carry forward indefinitely if they exceed gains plus the $3,000 ordinary income limit.

Example:

You have a $12,000 long-term capital gain from selling a stock that doubled. You also have a position down $8,000 from cost.

Sell the losing position. Results:

• Capital gain: $12,000
• Capital loss offset: -$8,000
• Net taxable capital gain: $4,000

At 15% long-term capital gains rate, tax on $12,000 was $1,800. After harvesting, tax on $4,000 is $600. Tax saved: $1,200.

The Wash Sale Rule

The IRS prohibits claiming a loss if you buy the "same or substantially identical" security within 30 days before or after the sale. This is the wash sale rule.

What triggers wash sale:

• Selling VTI (Vanguard Total Market ETF) and buying VTI within 30 days
• Selling AAPL and buying AAPL within 30 days
• Selling a mutual fund and buying an essentially identical mutual fund

What does NOT trigger wash sale:

• Selling VTI and buying ITOT (iShares Core S&P Total Market) — different fund, similar exposure
• Selling an S&P 500 fund and buying a total market fund — different index
• Selling AAPL and buying MSFT — different companies

The key: maintain market exposure through similar-but-not-identical securities.

Common harvesting pairs:

• VTI → ITOT (total US market, different issuer)
• VXUS → IXUS (international developed, different issuer)
• BND → AGG (total bond market, different issuer)
• SPY → IVV → VOO (S&P 500, rotate among the three with 31-day waits)

When Tax Loss Harvesting Is Most Valuable

High income years. Tax loss harvesting is worth more in the 37% bracket than in the 22% bracket because gains taxed at higher rates produce larger savings when offset.

Years with large realized gains elsewhere. Selling appreciated real estate, exercising stock options, or selling a business generates gains you can offset.

Volatile markets. Broad market declines of 10-20% create harvesting opportunities across an entire portfolio simultaneously. The 2022 bear market produced extensive harvesting opportunities.

Early retirement planning. Building a large capital loss carryforward before retirement means you can realize gains in retirement tax-free (or at 0% rate in low-income years) without triggering taxes.

The Reinvestment Decision

After selling a losing position, you have 30 days before you can buy back the original. During those 30 days:

1. Invest in the substitute security immediately to maintain market exposure
2. After 31 days, decide whether to return to the original or stay in the substitute

If the market rises during the 30-day window, you capture those gains in the substitute. If it falls, you capture additional losses. You are never out of the market.

Calculating Your Tax Savings

Scenario: $50,000 portfolio in a taxable brokerage. Position A (purchased at $20,000) is now worth $12,000 — an $8,000 unrealized loss.

Sale proceeds: $12,000 Cost basis: $20,000 Capital loss generated: $8,000

Applying the $8,000 loss:

| If Offsetting | Tax Rate | Tax Saved | |--------------|----------|-----------| | Short-term capital gain | 24% | $1,920 | | Long-term capital gain | 15% | $1,200 | | Ordinary income ($3,000 max) | 24% | $720 | | Carry forward to next year | Future rate | Varies |

The $8,000 loss is most valuable against short-term gains at ordinary income rates.

The Long-Term Cost: Higher Future Basis

Tax loss harvesting defers taxes, it does not eliminate them. When you sell the substitute position later, your cost basis is lower (you sold the original at a loss, establishing a new cost basis for the substitute at current prices).

If the substitute position recovers and rises to the original price level, you will owe taxes on the gain at that point. The benefit is the time value of money — you delayed the tax, invested the savings, and earned returns on the deferred amount.

The longer the delay (especially into retirement when rates may be lower), the more valuable the deferral.

Automated Tax Loss Harvesting

Several robo-advisors offer automated daily tax loss harvesting:

• Betterment: Daily monitoring, automatic harvesting
• Wealthfront: Daily monitoring, direct indexing for accounts over $100,000
• Schwab Intelligent Portfolios: Daily harvesting

Wealthfront's direct indexing (buying individual stocks instead of ETFs) allows harvesting of individual stock losses within an index, more opportunities than ETF-level harvesting.

The fee for automated harvesting is typically 0.25% of assets annually. Evaluate whether the tax alpha exceeds the fee for your specific tax situation.

Frequently Asked Questions

Can I tax-loss harvest in a retirement account?

No. Retirement accounts (IRA, 401k) are tax-deferred. There are no taxable capital gains or losses to realize within the account. Tax-loss harvesting only applies to taxable brokerage accounts.

How much does tax-loss harvesting save over 20 years?

Estimates vary by market conditions and portfolio size. Betterment and Wealthfront research suggests 0.2-0.8% annual return improvement from harvesting in a well-diversified portfolio, compounding over decades to significant amounts. On a $500,000 portfolio at 0.5% annual improvement, that is $2,500/year, or roughly $75,000 over 20 years.

What if my losses exceed my gains in the same year?

You can deduct up to $3,000 in net capital losses against ordinary income per year. Excess losses carry forward to future years with no expiration. A large loss year becomes a tax asset you draw down against gains for years afterward.