Tax-loss harvesting (TLH)

Tax-loss harvesting (TLH) is the practice of selling positions with unrealized losses in taxable accounts to realize the loss for tax purposes. The realized loss can offset capital gains and up to $3,000 of ordinary income per year, with the remainder carried forward indefinitely.

The wash-sale rule

Under IRC Section 1091, if you purchase the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed (deferred until the replacement is sold). This is the wash-sale rule.

To harvest a loss while staying in the market, you must buy a replacement that's NOT substantially identical. Examples:

• VTI (Vanguard Total US Stock Market) → SCHB (Schwab Broad Market) — same exposure, different fund, generally not substantially identical
• VOO (S&P 500) → VTI (Total Market) — overlap but different indexes
• BND (Total Bond) → AGG (iShares Aggregate Bond) — similar exposure, different issuer

The IRS has never definitively defined "substantially identical" for ETFs, but most practitioners treat different-index ETFs as safe replacements.

The math

A $10,000 realized loss in the 23.8% bracket (LTCG + NIIT) generates $2,380 of tax savings — assuming you have at least $10,000 of long-term gains to offset. Without gains, the loss offsets $3K of ordinary income each year, with the remainder carried forward.

Coordination with rebalancing

Many platforms now do "tax-aware rebalancing" — when your allocation drifts and a tactical sell is needed, the platform picks lots with losses first.

Year-end vs continuous

Older approaches harvested only at year-end. Modern platforms harvest continuously, capturing volatility losses that disappear by year-end. The IRS doesn't care when you harvest, only that you respect the wash-sale window.