Tax-loss harvesting for US investors

Tax-loss harvesting is one of the most practical strategies available to US investors for reducing their tax bill. By selling holdings that are currently at a loss, you can offset capital gains realised elsewhere in your portfolio and potentially lower your taxable income.

In this guide, we explain how tax-loss harvesting works, cover the important wash sale rules, and show how TrackMyShares helps you identify opportunities.

Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. Consult a qualified tax professional before making investment decisions based on tax considerations.

What is tax-loss harvesting

Tax-loss harvesting is the practice of selling an investment that has declined in value to realise a capital loss. That loss can then be used to offset capital gains from other investments you sold at a profit during the same tax year.

For example, if you sold shares of one stock for a $5,000 gain and another stock is currently sitting at a $3,000 unrealised loss, you could sell the losing position to offset $3,000 of that gain. You would only owe taxes on the remaining $2,000.

How it works for US investors

The IRS allows you to use capital losses to offset capital gains dollar for dollar. Here is how the offset order works:

1. Short-term losses offset short-term gains first — Both are taxed at ordinary income rates, so this provides the highest tax benefit
2. Long-term losses offset long-term gains first — Both are taxed at preferential capital gains rates
3. Remaining losses offset gains of the other type — If you have excess short-term losses, they offset long-term gains, and vice versa
4. Up to $3,000 of net losses can offset ordinary income — If your total losses exceed your gains, you can deduct up to $3,000 ($1,500 if married filing separately) against other income
5. Excess losses carry forward — Any unused losses carry forward to future tax years indefinitely

Wash sale rules

The wash sale rule is a critical consideration when tax-loss harvesting. The IRS disallows a loss deduction if you purchase a "substantially identical" security within 30 days before or after the sale.

The 30-day window

The wash sale window spans 61 days in total:

• 30 days before the sale
• The day of the sale
• 30 days after the sale

If you buy the same stock (or a substantially identical security) anywhere in that window, the loss is disallowed.

What counts as substantially identical

The IRS does not provide an exhaustive definition, but generally:

• Same stock — Buying back the exact same shares triggers a wash sale
• Options on the same stock — Can trigger a wash sale
• Different share classes of the same company — May trigger a wash sale

What is generally considered not substantially identical:

• Different companies in the same sector — Selling one tech stock and buying another is typically fine
• Different index funds tracking different indexes — Selling an S&P 500 ETF and buying a total market ETF may be acceptable, though this is a grey area

What happens when a wash sale is triggered

The disallowed loss is not permanently lost. Instead, it is added to the cost basis of the replacement shares. This means the loss is deferred rather than eliminated, and you may benefit from it when you eventually sell the replacement shares.

How TrackMyShares identifies opportunities

TrackMyShares includes a dedicated tax-loss harvesting tool that analyses your portfolio automatically. Here is what it provides:

Summary cards

• Realised gains this financial year — Your total capital gains from sales, split into short-term and long-term
• Total harvestable losses — Combined unrealised losses across all holdings trading below cost basis
• Estimated tax savings — How much you could save based on your marginal tax rate

Opportunity table

Each holding with an unrealised loss is listed with a recommended action:

Wash sale warnings

TrackMyShares scans your transaction history and flags any sales where a wash sale may apply. Warnings include the sale date, repurchase date, and the amount of the disallowed loss.

Step by step: using the tax-loss harvesting feature

1. Open a transaction-based portfolio (or consolidated portfolio)
2. Click the menu (three dots) in the portfolio header
3. Select Tax loss harvesting
4. Set the tax region to US and select the current financial year
5. Adjust the marginal tax rate slider to match your situation
6. Review the summary cards for an overview of your position
7. Scroll through the opportunities table to see which holdings have harvestable losses
8. Click any row to expand lot-level details, showing which specific purchase lots are at a loss
9. Check the wash sale warnings section before acting on any opportunity

Important considerations

Tax-loss harvesting is not free money

While harvesting losses reduces your tax bill today, selling a position means you no longer benefit if it recovers. Consider whether the tax savings justify exiting a position you believe in long term.

Watch the wash sale window

If you plan to repurchase a stock after harvesting the loss, you must wait at least 31 days to avoid triggering a wash sale. During that period, you are exposed to market movements without holding the position.

Keep your records up to date

For the analysis to be accurate, your transaction history in TrackMyShares must be complete. Missing transactions can lead to incorrect gain/loss calculations and inaccurate recommendations.

End-of-year timing

Tax-loss harvesting is most commonly done toward the end of the calendar year when you have a clearer picture of your realised gains. However, opportunities can arise at any time, especially during market downturns.

This is not financial advice

Tax-loss harvesting involves both tax and investment considerations. The information in this guide and in TrackMyShares is for educational purposes. Always consult a qualified tax professional before making decisions.

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