[Editor's Note: Today's WCI Network post is from the Physician on FIRE and is about getting Uncle Sam to share in your losses by tax loss harvesting.]
Whenever the stock market loses at least 10% of its value, as it does most years, those of us with taxable brokerage accounts have an opportunity to lower our tax bills.
Tax loss harvesting (TLH) is a simple maneuver. You’re selling one asset and buying another. However, it’s often misunderstood and not done in an ideal manner. The tax loss harvesting tips that follow should answer some of your questions and help you make these transactions confidently.
I’ve harvested something close to $300,000 in losses over the past six or seven years. February and March of 2020 were particularly fruitful. At this point, if I realized no capital gains, I could use my accumulated paper losses to offset $3,000 of earned, ordinary income for the rest of my life and then some.
However, sometimes I realize capital gains, like when I sold some lakefront property in 2020, taking a high five-figure gain that will take away a chunk of my carried-over losses.
I also had a microbrewery investment go full-circle in 2020, and I realized more capital gains there. We’ll also be selling our $90,000 house for a significant gain in 2021. In all of these cases where capital gains are realized, my prior losses from TLH efforts will ensure that I don’t owe any taxes on the newly realized gains.
You never know when it might be helpful to have some pocketed losses, so I’m always on the lookout for another TLH opportunity.
Top 5 Tax Loss Harvesting Tips
I’d like to dispel some myths and offer some tips to make tax loss harvesting (TLH) easier and more effective. If you’re new to the concept, I consider the following posts, particularly the Vanguard guide, to be prerequisites.
Please read these first as they’re actually chock full of tips, also, along with screenshots that show you exactly what to do.
- Tax Loss Harvesting with Vanguard: A Step by Step Guide
- Tax Loss Harvesting with Fidelity: A Step by Step Guide
And, from WCI:
Briefly, tax loss harvesting is a way to book losses without being out of the market for any significant time and without a substantial change to your asset allocation.
You do this by selling one asset, say a total stock market fund like VTSAX/VTI and simultaneously or shortly thereafter purchasing one that would be expected to perform similarly.
In this case, an S&P 500 fund like VFIAX / VOO could work. No, it doesn’t have the extended market (mid-caps and small caps) that the total market fund does, but its performance is going to be very similar. The correlation between the two funds’ return is 99%.
TLH is a quick and easy way to save $1,000 or more on your annual tax bill and potentially save a whole lot more if you can offset large realized capital gains in the future. The following are my top five tips and clarifications, along with some bonus tips at the end.
#1 Take a Big Enough Loss
I generally like to see a four-figure loss before pulling the TLH trigger. You’ll notice that in my Vanguard example, I took a loss for under $1,000. Why? Mainly because I wanted to put together the post and I took the first opportunity that came along to demonstrate a loss.
It does take a bit of time and energy to TLH, and it means buying something that you didn’t initially own. It makes having a true three-fund portfolio extremely difficult. I wouldn’t do it to take a loss of dozens or a few hundred dollars.
However, any time you can take a loss of at least $1,000, I say go for it. That’s a 10% loss on a $10,000 investment or a 2% loss on a $50,000 investment.
#2 Buy Something You’d Be Comfortable Owning Forever
Here’s a dilemma I’ve heard from investors who successfully tax loss harvested but then felt stuck. They had exchanged into a fund they weren’t comfortable keeping.
Don’t do that.
What can happen and frequently does happen is a swift rebound in the stock market after you’ve made an exchange. If the market is up a month later, you can’t trade back to your original holding (the asset you sold) without realizing some capital gains and at least partially canceling out the paper losses you previously booked.
My advice is to never purchase something you wouldn’t be comfortable owning indefinitely.
An exception can be made for generous souls who donate appreciated assets to charity. That’s one way to part with an asset you might consider to be suboptimal in your portfolio.
#3 You CAN Sell Something You Just Bought
This isn’t so much a tip as it is a clarification of the wash sale rules. A wash sale occurs when you purchase or have purchased a “substantially identical” asset to the one you sold for a loss in the 30 days before and after the sale (or the day of the sale).
That’s a 61-day window in which you cannot have purchased “replacement shares” for the ones you sold.
So, if you purchased some VTSAX less than 30 days ago, can you sell it now and claim a loss? Yes, you can, as long as you sell all VTSAX purchased in the prior 30 days at the same time. If you’re making weekly or biweekly purchases as some people like to do, you can sell each lot at a loss.
If you have multiple newly-purchased lots and some of them have gains while the others have losses, you still have to sell all lots purchased in the last 30 days to avoid a wash sale.
A wash sale isn’t the end of the world, though. Here’s what happens, as illustrated on the Bogleheads Wiki:
“For example, you bought 100 shares of a mutual fund at $40. On March 1, you sold 100 shares at $30. On March 10, you bought 100 shares at $35. Your sale on March 1 was a wash sale, so you could not deduct the $1,000 loss at the time, but your basis in the March 10 shares is $4,500, not $3,500, so you will reduce your capital gains or increase your losses when you sell those shares.”
Also, most wash sales are only partial wash sales. This can happen if you automatically reinvest dividends or have automated investments into a retirement account.
If you sold 100 shares at a loss and bought 10 shares within 30 days, you can take the loss on 90 shares and the cost basis of the 10 newly purchased shares would be adjusted.
#4 You Are NOT Locking in a Loss
Again, this is more of a clarification. Any time TLH is brought up in a public forum like a personal finance Facebook Group, someone (usually a few people) will chime in that they’re buy-and-hold investors or that one should never sell low.
I don’t consider tax loss harvesting to be violating either of those principles.
I buy and hold an asset class. If I happen to bounce back and forth between Vanguard’s Total International Stock Index Fund (VTIAX) and their All-World ex-US Fund (VFWAX) with an instantaneous exchange at the end of the trading day, I remain fully invested. I’m just invested in a slightly different but not substantially identical fund in the same asset class.
You’re definitely not locking in an actual loss unless you only sell and choose not to buy a similar asset. If you do, that’s not really tax loss harvesting. That’s just a losing investment strategy, although it’s better to sell for something than nothing.
Index funds, unlike individual stocks, however, are not really at risk of going to zero. If they actually do become worthless, I imagine we’ll have larger worries than our investment account balances. Like how much canned food we have in the bunker. Or how to defeat the alien visitors.
#5 Consider a Series of Tax Loss Harvesting Partners
Tax loss harvesting can feel a bit like market timing, and in some ways, it is. You’re hoping to sell when the market has hit rock bottom.
I got lucky selling at the post-Brexit vote trough and again on Christmas Eve in 2018, but the timing on those trades was pure luck.
Sometimes, you’ll harvest some losses only to watch the market drop further. Now you have a newly-purchased fund with a loss but you can’t trade back into the fund you just sold for 30 days.
This is where a third fund, and maybe a fourth or additional funds can be helpful.
When we talk about tax loss trading partners, we’re talking about funds that are similar but not identical. There are gray areas here, as the IRS has not given guidance as to what exactly constitutes a “substantially identical” fund. All you will find online are opinions. They may be expert opinions, but they’re still just someone’s best-educated guess.
Personally, I would avoid trading two funds that are different share classes of the same fund (VTSAX to VTSMX) or the ETF to mutual fund with identical holdings (VTSAX to VTI). I also wouldn’t try tax loss harvesting from one fund to another that tracks the exact same index, like the S&P 500.
There are people who disagree, and that’s fine. If a gray area is easy enough to avoid, I try to avoid it.
Back to using a series of tax loss trading partners.
Say you sold VTSAX (total stock market) and bought the S&P 500 fund. Now that fund has a loss. You could trade it for a third fund. The Large Cap fund, VLCAX, could do the trick.
What if that fund has losses and 30 days isn’t up?
You could choose another large cap fund like Large Cap Growth or Large Cap Value. Don’t forget about rule #2, though—only buy what you’d be willing to hold indefinitely, and our holdings are getting more different from the original fund, especially with the value fund, and the expense ratio has also risen.
A better alternative might be buying a fund from a different brokerage. Both Schwab and Fidelity have total stock market funds that follow a different index than VTSAX.
- VTSAX tracks the CRSP US Total Stock Market Index
- SWTSX (Schwab) tracks the Dow Jones US Total Stock Market Index
- FSKAX (Fidelity) also tracks the Dow Jones US Total Stock Market Index
- FZROX (Fidelity Zero Fee) tracks a proprietary index used only by Fidelity
Those are a few options and you can always use the ETF versions of funds when they exist. But again, I personally would not trade from one mutual fund to its corresponding ETF or vice versa and expect to book those losses.
I’ve also played this game with the international funds in my taxable account. Several years ago, I jumped from All-World ex-US to Total International to Developed Markets + Emerging Markets and swapped Developed Markets for the European and Pacific Stock Index funds.
That last trade probably violated my 2nd tip about only buying what you intend to keep, but the market dropped some more eventually, and I was able to get back to my original position in the Ex US fund with one last TLH exchange.
Bonus Tips
Avoid owning the same asset classes in your IRA as you have in your taxable brokerage account. This way, automated reinvestment of dividends can never create a wash sale. I have a REIT fund, a mid-cap fund, and a small-cap fund in my Roth IRA.
Turn off automatic dividend reinvestment in your taxable brokerage account. Reinvest manually, instead. Most funds pay dividends quarterly; I only have to do this four times a year.
Set your cost basis to show the basis of individual lots. If possible, do this after you buy, rather than when you’re ready to sell. Vanguard calls this “Specific ID”. With Fidelity, it’s “Specific Shares”.


Understand that your spouse’s accounts can create wash sales. Some couples keep much of their finances separate, but for the purpose of tax loss harvesting, you should have some idea of what he or she has in a brokerage account or IRA. Wash sales can result from purchases in those accounts. The same is true of purchases in an investment account of a business you own.
Know that there’s a 60-day qualified dividend rule as The White Coat Investor points out. If you hold a fund for less than 60 days and it pays a dividend during that time, it will be an ordinary, non-qualified dividend taxed at ordinary income rates. The consequence is probably trivial unless you take a very small percentage loss on a very large sum of money, but it’s worth mentioning.
Let someone else do it. If you’d like the benefit but are overwhelmed by the practical application of it, a roboadvisor like Betterment will use an algorithm to automate the process and do it for you. Their total investment management fees run about 0.25% per year, which could negate the benefit of tax loss harvesting for high net worth individuals.
What About 401(k)s? 403(b)s? 457(b)s? HSAs???
I don’t know. No one does.
The fact that no one seems to know for sure would indicate that no one is aware of the IRS calling someone out on a wash sale resulting from a purchase in any of these accounts.
It’s also worth pointing out that your taxable brokerage account most likely doesn’t see what happens in these other accounts. It would be on you to report any such wash sale.
Here’s what the Bogleheads have to say about the issue:
“The IRS has not specifically ruled that other tax sheltered accounts, such as 401(k) or 403(b) accounts, are exempt from wash sale rules.”
Mike Piper, the Oblivious Investor, says this in his post on the topic.
“Section 1091 of the Internal Revenue Code is the law that creates the wash sale rule. It doesn’t mention retirement accounts at all. The rule about wash sales being triggered from purchases in an IRA comes from IRS Revenue Ruling 2008-5. If you read through the ruling, you’ll see that it speaks specifically to IRAs and does not mention 401(k) or other employer-sponsored retirement plans.
To the best of my knowledge, there is no official IRS ruling that speaks specifically to wash sales being created by a transaction in a 401(k). In other words, I’m not aware of any source of legal authority that clearly says that a purchase in a 401(k) would trigger a wash sale.
However, in my opinion, it seems pretty clear that the line of reasoning in the above-linked revenue ruling would apply to employer-sponsored retirement plans as well as IRAs.
So, personally, I would not be comfortable taking a position on a tax return that’s based on the assumption that purchases in a 401(k) cannot trigger a wash sale. But that’s just my personal opinion. Others may disagree.”
If you read the whole post, he also says he would not be comfortable defending two different total stock market funds from different companies that track different indices as anything other than substantially identical. In other words, he would not tax loss harvest from VTSAX to SWTSX to FZROX. It’s another gray area, but one I’d personally be more comfortable with.
Regarding the HSA, again there is no clear guidance, but not many people would insist you could create a wash sale with a purchase there. But if you want to be exceedingly careful, it is another potentially gray area that can be avoided. I simply own a total bond fund in mine.
I hope these tips give you the power to tax loss harvest on your own. If you have questions about the actual process of buying and selling, it will look different on every platform, but, these guides may be helpful:
- Tax Loss Harvesting with Vanguard: A Step by Step Guide
- Tax Loss Harvesting with Fidelity: A Step by Step Guide
- Tax Loss Harvesting with Vanguard from the White Coat Investor
- A Step-By-Step Guide to Tax Loss Harvesting also from WCI
Do you have additional tax loss harvesting tips or questions? Leave them below!
Thank you for this post.
I recently lost approx. 10 k in my brokerage account.
I will be selling an investment rental expected me to net a profit of 150 k
Some people recommend doing 1031 exchange
Another brokerage account has a loss of 100 k or so? (friend recommends to hold as stock will go higher)
What would you advise?
Thx
Raj
Regarding the holding in the brokerage account, I would decide whether to sell, hold, or buy based on your present evaluation of the asset and its potential future earnings. It sounds like this may be an individual stock holding, and it’s difficult to find a different individual stock that can be expected to perform very similarly to the one you own. It’s easier with mutual funds or ETFs to swap one for another that is very similar but not substantially identical.
Similarly with the rental property, if you want to remain invested in real estate, a 1031 exchange is an excellent idea to defer taxation. You only avoid taxation with a 1031 exchange if you die with appreciated assets AND the step up in cost basis at death is not legislated away.
So I’d look at those 2 situations independently, and not let the tax tail wag the dog. If it happens that you don’t want to own that stock that’s down and you don’t want to remain invested in real estate, then the loss on one will offset ~ 2/3 of the capital gains taxes on the other.
Cheers!
-PoF
If you want to still own rentals, then yes, exchange.
Tax loss harvest your losses to help offset capital gains.
My crystal ball showing what your unnamed stock will do in the future is very cloudy.
Great post. I’m new to TLH. For reinvested dividends in a 401k, how would you go about subtracting this from a TLH event? I’m realizing now that I made a sale/purchase in my taxable account with the goal of TLH earlier this year, but I own the same fund that I sold in my 401k and surely will have had some dividends that were reinvested during the wash sale period. When I do my taxes, do I have to look through my accounts and subtract the reinvested dividends from whatever amount I’m trying to claim as a tax loss? Thanks for your help
Since we don’t know definitively that purchases within a 401(k) can actually create a wash sale, I personally wouldn’t be overly concerned about it. It’s a gray area. But I would try to avoid it in the future, as it’s easy enough to prevent.
If you work with a CPA, you could bring this to his or her attention. If you DIY, look at Schedule D and Form 8949 where wash sales are calculated and recorded.
Best,
-PoF
401k purchases/sales don’t count toward the wash sale rule, at least by the letter of the law. IRA purchases/sales do. So you should be good.
Even Index funds throw off short term cap gains, usually in December. If you try to take losses while short term, you can offset these higher taxed gains. Not a huge advantage, but something.
Generally, don’t TLH into money market funds. You will miss out on the Equity Risk Premium by being out of the Market for the month. Swedroe says you have a 70% likelihood the Market will be higher over that period.
Tax loss harvesting with a wash sale will put the loss “in the bank” deferring the loss until you sell the replacement shares.
TLH is actually kinda fun. The best cure for loss aversion.
I definitely agree on not sitting on cash (in a money market account) for a month and waiting to rebuy what you sold, a strategy I’ve seen touted elsewhere. The stock market is way too volatile, and a lot can happen in a month. It’s not uncommon for the opportunity cost of being on the sidelines to more than wipe out the benefit of tax loss harvesting.
Shoot, being out of the market just overnight can be disastrous, as l learned the hard way in March of 2020: https://www.physicianonfire.com/investing-mistakes/
Cheers!
-PoF
“Index funds” is a broad category. It varies by the fund and its manager. Vanguard’s Total Stock Market Index Fund hasn’t distributed a long term capital gain, much less a short term capital gain, for almost two decades, mostly due to its ETF share class/hybrid structure. It’s very tax efficient.
The Bogleheads Wiki section has some very useful pages on Approximating Total Stock and Total International if you want to match your preferred index fund as close as possible.
Is there any added benefit to having individual stocks when tax loss harvesting? I have had several prospective FA recommend I have many individual stocks so I can tax loss harvest more frequently. I don’t get how it enhances your ability to TLH.
When I TLH with an ETF last March I moved from VTI to VV. If there is another big drop, I can switch back from VV to VTI without issue, right? Just want to make sure before and if it happens.
That’s kind of the idea behind “direct indexing.” Own a basket of many individual stocks, and you’ll have more lots with losses than if you owned the index.
It’s more difficult to try to match an individual stock with a trading partner that might perform similarly, but when you own dozens (hundreds?) of individual stocks, it probably doesn’t matter as much.
This would be cumbersome for an individual to manage, but a firm with the help of some algorithm / AI can get the job done.
Regarding trading back from VV to VTI, you are welcome to do that without wash sale concerns on the 31st day after you sold VTI. You could also have been buying more VTI anytime since the 30 days had passed. It would take a major drop to get to below March 2020 levels to put your VV in the red, but anything is possible.
Cheers!
-PoF
Sure, more opportunities to TLH, but not worth the hassle and uncompensated risk IMHO.
Yes, you can make those switches.
Thanks for this article. A point of confusion for me – with tax loss harvesting, have I not reduced my cost basis which ultimately yields higher future capital gains? And if so, maybe you are saying it’s worth it. In other words, If it does reduce cost basis, money now (tax savings) is better to have time (longer time in the market) compared to money cost later (in taxes) Thanks for your blog and considering responding to my question!
You are correct about lowering your cost basis.
One of the benefits is the tax arbitrage between capital gains and ordinary income taxes. Each year, you can deduct $3,000 in losses against higher ordinary income tax rates. You may — and I emphasize **may** — recapture the capital gains someday, but presumably at a lower rate, barring any major upheaval in our tax code.
Additionally, there are ways to avoid capital gains taxes entirely. Realize them in retirement when your taxable income is much lower, donate your shares, or die. There are ways to avoid capital gains: https://www.physicianonfire.com/paynotax/
Cheers!
-PoF
Thank you for your response. Yes, I can plan for tax optimization in future. I also have general approach of take the advantage now, which applies in this situation. Thanks for underscoring that reducing ordinary income tax is a major gift.
You are correct about lowering your cost basis.
One of the benefits is the tax arbitrage between capital gains and ordinary income taxes. Each year, you can deduct $3,000 in losses against higher ordinary income tax rates. You may — and I emphasize **may** — recapture the capital gains someday, but presumably at a lower rate, barring any major upheaval in our tax code.
Additionally, there are ways to avoid capital gains taxes entirely. Realize them in retirement when your taxable income is much lower, donate your shares, or die. There are ways to avoid capital gains: https://www.physicianonfire.com/paynotax/
Cheers!
-PoF
Very hard to beat a 0% tax bracket. Now if you live in high tax State like New York, you will pay significant taxes on your LTCG. If you contribute to IRA’s, 401k, HSA’s you have good control of your taxable income if still employed. If you are self-employed, you can put massive amounts into a 401k. . I consider high basis Stock funds to be kinda like low tax cash.Tax Gain Harvesting gives you OPTIONS. The years of ” retirement” or low income years before you are forced to take RMD’s are particularly advantageous.
Beware of the tax “bump” zones: https://www.kitces.com/blog/long-term-capital-gains-bump-zone-higher-marginal-tax-rate-phase-in-0-rate/
The asset has to decrease in value beyond the original purchase price… correct?
So if I purchase 50k in total US stock index, and the value rises to 60k over the next year. If the price then drops to 55k, I can’t sell/purchase S&P 500 index and tax loss harvest… correct?
And what then should I do in this scenario? Doesn’t seem right to realize the gain?!?
Correct. No, don’t realize the gain.
No, you cannot TLH since you did not have a loss on your original investment. You would be doing Tax Gain Harvesting. If you are in the 0% LTCG bracket (~80k taxable income MFJ), you could take the gain, but you don’t have to. Most years the Market is up and you will have minimal Capital losses. Capital losses stay on the books until you die. No Wash Sale rules on LTCG.
Read over “livesoft” on the Bogleheads forum. The Master of TLH. He also has a method for investing called “Real Bad Day.”
Thank you POF for this post. I currently have the 3 fund portfolio (or some approximation) across all of my accounts. Would you consider using a vanguard lifestrategy or target date retirement fund in your roth accounts to avoid a wash sale?
They have the underlying 4 funds for total diversification.
Regards,
Psy-FI MD
Can someone clarify the HSA Wash sale comments. The concern is that tax loss harvesting in a taxable account can become a wash because of automatic investments occurring in the HSA and not any TLH in the actual HSA? At this early point in my career I only have tax advantaged accounts so i would’t be able to TLH at all…correct?
I don’t think an HSA (like a 401k) is included like IRAs are. I wouldn’t worry about it. Certainly the IRS isn’t getting a detailed list of your HSA investment transactions. The 5498-SA only lists what you own in there on 12/31.
But no, there is no point to TLHing if you don’t have a taxable account.