By Eric Rosenberg, WCI ContributorTax-loss harvesting is an investment strategy in which you sell investments when they’re down in value and rebuy similar investments to maintain the same portfolio makeup. Doing so allows you to lock in tax losses without dramatically changing your investments. In the long run, this can add up to significant tax savings.
Here’s a closer look at tax-loss harvesting with Fidelity to help you capture tax benefits from the ups and downs of the stock market.
What Is Tax-Loss Harvesting?
Tax-loss harvesting, sometimes called TLH, is the process of selling shares of an asset at a loss, typically paired with the simultaneous or subsequent purchase of a similar but non-identical asset. The process only works in a taxable account, like a regular brokerage or robo-advisor account. Making a similar trade in an IRA or another tax-advantaged retirement account will not give you a tax benefit.
As we’re more into index funds than single stocks at The White Coat Investor, much of our experience with tax-loss harvesting is by swapping one fund with a similar fund that is not substantially the same. You can harvest losses with individual stocks, but the difficulty is finding another stock that you can expect to perform similarly. The point of TLH is that you're taking a paper loss without actually altering your asset allocation significantly.
The wise investor swaps the losing investment for one that is highly correlated with it. The net effect is that your portfolio doesn't change substantially, but you still get to claim the losses on your taxes. As an example: A typical exchange might be to swap the Vanguard Total Stock Market Fund (VTSAX) for the Vanguard 500 Index Fund (VFIAX). These two funds have a correlation of 0.99, but hardly anybody would argue they are substantially identical. The first holds thousands more stocks than the second, they have different CUSIP numbers, and they follow different indices.
You can also tax-loss harvest with ETFs or between mutual funds and ETFs. You may miss out on time in the market if you're waiting for the proceeds of the sale to hit your settlement fund before you can use it to buy a TLH partner. This may be inconsequential or beneficial if the market drops while you wait.
More information here:
Tax Loss-Harvesting with Vanguard
Why Tax-Loss Harvest?
When you take a loss in the markets, those losses will first be used to offset any capital gains you may have incurred that year. Once any gains are used up, your tax losses can offset up to another $3,000 per year of ordinary income.
That $3,000 less in taxable income every year can be significant for high-income professionals. If you’re at the top of the tax brackets, you could have a total marginal tax rate of as much as 35%-50%. That means an additional $3,000 deduction can be worth $1,000-$1,500 annually. Additional losses can carry over to future years. If you save up $3,000 per year in deductions over many years, you can capture a major tax benefit if the markets drop significantly.
It is true that when you tax-loss harvest, you lower your cost basis in the investments you own. This could set you up to recapture some of the taxes by paying more capital gains taxes later. However, it's well worth saving on ordinary income taxes now to pay possibly capital gains taxes later. Nearly everyone will pay a lower capital gains rate later than income tax rate now. At worst, you're deferring the tax.
If you have charitable aspirations, you can donate funds with the lowest cost basis (and most potential gains) to charity. I do this by donating to and from a donor-advised fund. Check out our full post on the Fidelity donor-advised fund offering to learn more about how that works.
Finally, if you die with assets in a taxable brokerage account, the cost basis is reset to the current value when inherited, thanks to the step up in basis at death. Those potential capital gains taxes disappear for your heirs.
Avoid a Wash Sale
If you’re tax-loss harvesting, take care to avoid a wash sale. Doing so can negate the benefits of your TLH strategy. For example, if you sell an asset for a loss, some or all of that loss will be ineligible to be reported as a loss if you have a purchase of the same or a “substantially identical” asset 30 days before or after your TLH sale.
For example, let’s consider a tax-loss harvesting transaction in which we sell the Fidelity Enhanced Large Cap Core ETF (FELC). If you replace it with the Fidelity Large Cap Core Index Fund (FLCEX) within 30 days—a mutual fund that’s effectively the same—it would be a wash sale, and you would lose the tax loss benefit.
The prevailing opinion from quality sources, including Bogleheads, is that funds tracking different indices are not substantially identical, even if there is significant overlap.
So, if you wanted to sell Fidelity's Total Market Index Fund (FSKAX) and buy the No-Fee ZERO Total Stock Market Fund (FZROX), you could do so. The former tracks the Dow Jones US Total Stock Market Index, while the latter tracks a new proprietary index from Fidelity. The same would happen if you wanted to sell the Fidelity Total International Index Fund (FTIHX) and buy the No-Fee ZERO International Index Fund (FZILX).
To help avoid making an accidental wash sale, you may want to turn off automated investments and dividend automatic reinvestment. It's also good practice to avoid holding substantially identical funds in any IRAs in which you or your spouse periodically invest or reinvest dividends.
More information here:
Tax-Loss Harvesting Pairs and Partners
Steps to Tax-Loss Harvesting with Fidelity
#1 Identify Losing Positions
First, click the “Positions” tab on the Fidelity website to see what you own in a taxable account. Then, click on the fund name and “Purchase History/Lots” to see the individual lots.
Here’s a look under the hood of my own Fidelity account. While I’ve done very well here and there are no good examples for tax-loss harvesting, you can sort by the Total Gain/Loss column to find prospective losses to capture. Here, my one down investment is in SCHZ.
Sorting your account by Total Gain/Loss can help you quickly identify TLH opportunities.
Expanding the details, I can see that most losses came from a single purchase made in 2019. I only bought $155 of the ETF, as I was packing a small amount of cash in the mostly inactive account. But imagine if that investment had another zero or two on the end. In that case, the loss would be worth $165 or $1,656.
Clicking on a stock or fund allows you to view your purchase history by lots, which is helpful if you’ve used dividend reinvestment or bought the security more than once.
If I sold my entire stake, I would get the $16.56 in tax losses, offsetting up to that value of capital gains this year. If I wanted only to sell the first 2.945 shares, I could enter a sale for that number of shares following the FIFO (first in, first out) option in the trade screen or the “Sell Specific” dropdown option in the sale type menu on the order screen.
The Sell Specific option allows you to pick specific purchases to sell, which is helpful for tax-loss harvesting.
#2 Exchange One Fund for Another
Let’s say you've decided to exchange shares of FZROX into another total stock market fund from Fidelity, FSKAX. While these funds will behave similarly, they are not identical, and they each follow a different index.
To exchange one mutual fund for another without sitting out of the market for any time, you can choose to exchange one mutual fund for another when selling.
Exchange one fund for another to avoid sitting out of markets.
You can sell a specific number of shares or sell by dollar amount.
Note that Fidelity mutual funds are not intended for frequent trading, and selling a fund purchased within 30 days is considered a “roundtrip transaction.” More than four of these in the same account will result in a hold on your ability to trade. More information is available in Fidelity's Excessive Trading Policy.
Turning off the automatic dividend reinvestment will limit the number of roundtrip transactions possible, which is another reason to make that change if you intend to follow a tax-loss harvesting strategy.
Automated Tax-Loss Harvesting
Managed accounts are Fidelity’s version of robo-advising. However, Fidelity Go doesn’t include automated tax-loss harvesting. You should check out our robo-advisor reviews to learn more if you're looking for that.
With automated tax-loss harvesting, your brokerage looks for tax-loss harvesting opportunities and makes automatic trades to capture the market's ups and downs.
More information here:
Is Tax-Loss Harvesting Worth It?
9 Reasons NOT to Tax-Loss Harvest
Your Turn for Tax-Loss Harvesting
While it may look complicated, entering a manual tax-loss harvesting transaction is simple. If you find a similar fund but different enough to avoid a wash sale, you can enter the tax-loss harvesting trade in less than a minute.
While it’s easier in accounts with many holdings, it’s also possible with simple accounts holding only a few funds. Even if the market is soaring to all-time highs, it feels inevitable that you’ll see opportunities for harvesting additional tax losses in the future.
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Thanks again for lessons on this topic.
“ It’s also good practice to avoid holding substantially identical funds in any IRAs that your or your spouse periodically invest (or reinvest dividends) in.”
Would one get flagged for wash sale if purchases of identical ETF or fund was made in the 61 day window in spouse’s 401k or Roth, and couple files joint return?
No, the IRS wouldn’t notice. But it is a wash sale to buy in an IRA within 30 days of selling in taxable. You’re supposed to report it yourself. It’s a gray area in a 401k though.
Potentially a TLH pitfall worth noting to the readership… as a steep market downturn becomes an attractive time to both rebalance retirement portfolios, as well as TLH. With simplified investing strategies (fund selections), these simultaneous events may result in selling/buying “substantially identical” funds in various accounts (or spouse’s account).
Nice, thanks!
Slightly unrelated, but related to taxes due on sales of ETFs: do you have any insight into the “same property” rule as it applies to the CARES Act? I noticed that you can take out up to $100,000 without an early withdrawal penalty and can split the income taxes over 3 years. For example, if you took an in-kind distribution of VTI from your Traditional IRA and also had a similar amount in your taxable brokerage account, could you take the distribution in-kind with basis at time of distribution, sell those shares, and the replace them with VTI shares?
I guess, the summary question is, “Does the ‘same property’ rule” also include the cost basis of the property?” Or as long as I replace shares of VTI, it’s not a violation? Do you know of any step doctrine guidance on this front?
I wouldn’t normally care, except for the part where the opportunity to effectively step up basis on $100,000 worth of VTI would be really nice.
You totally lost me there. Is your plan to move low basis VTI shares into an IRA? I guess if they allow you to do that you could save some taxes. I’m not certain you can do that though.
Ugh, sorry, yeah I was too convoluted and deleted a sentence that would have made it make more sense – that is, the CARES Act allows you to recontribute the money taken out over three years also and avoid the income tax by using the “indirect rollover” rules – which is where the “same property” part came from.
Yes, that’s the idea. I was thinking of reasons it might *not* be allowed. The same property rule was one of them as well as potentially the step doctrine. I’ll see if a tax accountant has any ideas. Thanks as always.
One item re: TLH confuses me:
I had shares of VTIAX, all purchased in Jan 2020 or earlier.
On 3/9/20, I TLH and sold all of my shares of VTIAX and purchased VFSAX.
Two weeks later (say 3/24/20), I thought about TLH again by selling all shares of VFSAX that I purchased on 3/9/20 and now purchasing shares of VFWAX.
Would this have been a wash sale being that the shares of VFSAX that I’m selling on 3/24/20 were purchased on 3/9/20?
I didn’t know for sure, so I ended up TLH by selling all VFSAX (purchased 3/9/20) and repurchasing VTIAX on 4/14/20.
Thanks. Chad
No, as long as you sell them all it’s fine.
We introduced Active Tax Management (differs from point in time) to clients 2 years ago. Here is an excerpt from recent communications. “Once we’ve harvested these losses and transitioned assets, is there really any long-term benefit to ongoing tax management?”
The answer is a resounding, “Yes!” In the previous commentary, I walked through an example of tax loss harvesting a 14% short-term capital loss in a Technology ETF that resulted in tax savings of 5.7% of the original position, reducing the client’s loss in value to 8.3% from 14%. What this transaction actually does is defer the payment of a capital gains tax this year on a gain elsewhere among the client’s holdings and allows those savings to lower the cost basis of the Technology holding (the new position was bought for a lower price, $87.70, than the harvested position, $101.96).
Imagine that Technology position is held, untouched for years and is later sold at $200. What changed due to the tax loss harvesting?
• Taxes Deferred: The 5.7% in taxes that would have otherwise been paid this year was kept by the client and allowed to earn compounded returns over all those additional years. If that 5.7% compounds for 10 years at a 4% return, it grows to 8.4% of the original investment amount. In 15 years, it more than doubles the original 5.7% in savings – that is the power of compounding deferred taxes.
• Taxes Reduced: The ultimate combined realized gains were the same, but this harvested 14% loss offset a short-term gain and was deferred into a long-term gain, which is ultimately taxed at lower long-term capital gains rates (currently a maximum of about 24% for long-term vs a maximum of about 41% for short-term).
• Taxes Potentially Reduced Further: In addition, the client may be older and earning less at the time the Technology position is sold, and they may be in a lower tax bracket with a lower capital gains tax rate.
• Taxes Potentially Reduced Even Further: Rather than selling the position, if the client holds the position for years until donating it to charity or bequeathing it to heirs as part of their estate, the capital gains taxes are avoided completely.
The example above illustrates how the client portfolio might have maintained its desired exposure to the Technology sector, deferred short-term capital gains, compounded returns on those gains, and eventually paid potentially lower taxes (or in some circumstances, no taxes at all).
I’m considering opening a Betterment (Safety Net/Emergency Fund) account. I already have a self employed 401K with Fidelity & a 401K elsewhere with my employer. I was wondering if it would be worthwhile opting for TLH if I open this Betterment account. I’m wondering if I wouldn’t risk running into the wash sale rule
Per the letter of the law, 401K transactions don’t count toward wash sales, only IRA transactions. Although some people worry the rule about IRAs could be applied to 401(k)s, the truth is nobody is really watching.
Thank you
I have a question about wash sales. I’ve been TLH ETFs in Fidelity, and on occasion (usually when I’ve bought the fund within 30 days of selling it) I am triggering a wash sale for some, but not all of my TLH. Here’s an example:
Bought IDEV on 12/20 and 12/24/21, TLH on 1/31/22, sold all and bought IEFA (no wash sales).
IEFA was purchased on 1/31/22 in 4 separate lots. Lot 5 was purchased 2/1/22. I sold all lots on 2/24 (another TLH) and bought SCHF.
However, for the sale of IEFA, here is what the lots looked like (I changed the numbers for the example):
Lot 1: 900 shares, proceeds $20,000, cost basis 30,000, loss (10,000)
Lot 2: 7,300 shares, proceeds $80,000, cost basis $100,000, loss ($20,000)
Lot 3: 845 shares, proceeds $57,000, cost basis $63,000, loss ($6,000)
*Wash Sale proceeds $0.00, cost basis -$6,000s, gain $6,000
Lot 4: 55 shares, proceeds 3,800, cost basis 4000, loss 200.00
*Wash sale proceeds 0.00, cost basis -200.00, gain 200.00
Lot 5: 845 shares, proceeds 57,000, cost basis 60,000, loss 3000
*Wash sale proceeds 0.00, cost basis -3000, gain 3000
So, It looks like Fidelity allowed me to take losses on the first 2 lots but called the last 3 lots a wash sale. If I was violating the 30 day rule it seems like the entire thing would be a wash. Was there a way to prevent this? I did set up the transaction as specific lots even though I was selling all – If I had just set up to sell all maybe that would make a difference?
-Also I don’t have these funds in IRAs or my spouses account.
Thanks!
That’s not a wash sale if you sold all the lots and didn’t buy any others. I’d call Fidelity up and ask what’s going on, why they’re calling it a wash sale because it isn’t. Maybe you confused them by selling so many different lots, but it doesn’t matter. There’s no wash sale here and they need to correct their records (unless there’s something you’re not telling me).
So after calling Fidelity, they explained that they marked those transactions as temporary wash sales then credited the amount of the wash back to me. When I look at my “realized gain/loss summary” for the year, it looks like this (with numbers changed):
short term realized gain 500.00
short term realized loss 150000.00
disallowed loss 10000.00
net gain/loss 140000.00
The net gain/loss is correct – I only TLH 140k total. Fidelity shows the temporary wash sales (10k) as a disallowed loss in the summary, but because it was credited back to me, adds 10k to my actual TLH and shows my short term realized loss as 150k. That way, when it subtracts out, I do get the correct amount of TLH (140k).
Long story short, no actual wash sales even though it presents in the summary table as such.
Weird, but all is well that ends well I guess.
Thanks so much for explaining this Tessa! I keep having the same issue TLHing ETFs in Fidelity and couldn’t figure out what was going on. Unfortunately, the Fidelity agent I spoke with was not so helpful!
Were fractional shares involved in any of these trades? I see a lot of confusing accounting at the itemized lot level on my Fidelity trades marking wash sales when fractional shares are involved. The first time I saw all this, I pored over the numbers trying to understand for like an hour. However, when I realized the net loss was as expected, I kinda gave up trying to understand all the detailed mumbo jumbo. Fine for one trade, but hard to just “trust” everything adds up for every future potentially more complex trade/situation.
I am looking to automate TLH trades on my Fidelity account using conditional contingent orders, so I don’t have to monitor the market in real time for potential losses & then scramble to place trades while I might be busy at work or elsewhere. For instance, pairing buy/sell orders of two Total Market ETFs contingent on .SPX dropping to a certain pre-determined value, at which point sale of Fund A and purchase of Fund B would be triggered. Limit orders seem useful for the buy side of a TLH trade: buy Fund B when its price drops to $__. However, there is no limit or other order option to SELL Fund A when it gets DOWN to $__, right? Limit orders are only for the traditional sell high, buy low approach? Also, even if Limit Order did work as desired and even if Fund A and Fund B are massive total market ETFs from two of the biggest brokerage firms, their correlation might be off by enough that a pre-determined limit price for each might be hit by Fund A but not by Fund B, or vice versa, meaning this attemtped TLH ends up either putting me out of the market completely or leaves me doubly invested, with no loss harvested. Pegging two paired TLH trades to a shared .SPX trigger value calculated at my desired % drop below current cost basis of Fund A seems to address that issue. My hesitation is: will the purchase of Fund B be rejected if it is dependent on proceeds of the sale of Fund A that aren’t there yet, if the pair of TLH trades are both triggered instaneously? Currently, I do as Jim once mentioned in a post about Fidelity TLH…open two Fidelity browser tabs, set up one with the Fund A sale ticket and set up one with the Fund B purchase ticket, sell Fund A in the first browser window, wait a few seconds for the order to fill & show in my account activity, buy Fund B in the second browser window within 30sec. There is a small lag between those two transactions, and I am refreshing to ensure the first order is marked filled in account activity, and Fidelity will not process the trade on a non-margin account if there are no proceeds/cash available. I guess I kinda answered my own question? Keeping enough cash on hand to back the Fund B purchase to ensure the trade goes through and/or initiating margin on my account would be the only ways to guarantee nothing gets rejected in the conditional contingent paired trades setup? I’d appreciate any thoughts or comments or shared experience on this approach anyone could offer. Thanks.
That seems like a lot of work even if it were possible. Why do you feel the need to be so exacting of your TLHing process? How often are you actually trying to do this? I mean, I tax loss harvested one fund this year. I tax loss harvested a bunch of funds all at once time in 2022 and also 2020, but I certainly don’t feel a need to leave orders hanging out there indefinitely to “capture” some freak loss that didn’t last long.
Well, the market dropped 10% this year between 2/19/25 and 3/13/25, with some single days seeing intraday as well as close-to-close fluctuations greater than 2%…I’m sure you noticed? As of the new year, I have approximately $70K split between two broad market ETFs in my Fidelity taxable brokerage acct. Within the aforementioned period of 3 weeks, I harvested $4000 in losses over 5 large trades on that $70K (I don’t see 5 trades in 22 days as excessive?)…and it would have been $5000+, if I could have either been sitting in front a screen the whole time watching the market move (completely undesired!!) or had figured out a way to automate trades according to my pre-determined thresholds (totally desired!!), e.g. “if the market drops another 2%, execute specified TLH trade to harvest $1000 in losses” and go about my day (or mutliple days) carefree without even looking at a stock quote. I see harvesting losses equivalent to 5-7% of invested funds as significant & worthwhile, especially since that kind of opportunity has been much more scare at a “macro level” over the ridiculous bull run from Oct 2023 to Feb 2025, if one assumes the completely zoomed out posture you describe in your reply. I previously had a taxable brokerage account at Wealthfront to explore the use of a roboadvisor, with a keen interest in the automated TLH & fixed allocation components. I liked many features of the account/interface, but the TLH was a total let down and the 0.25% management fee wasn’t worth it once new money wasn’t regularly being deposited into the account. For instance, from 7/16/24 to 8/5/24, the market dropped approx 8.5% and Wealthfront captured single digit $ losses on $200K in deposits diversified in one of their classic portfolios. Exacting? If by that you mean minimizing time out of the market & minimizing real losses (vs paper losses) when transitioning from one not-substantially-identical ETF to another to capture a tax loss? Pretty exacting. As I mentioned, I model execution of my TLH trades at Fidelity after the description provided by the very founder of WCI himself…which, as far as I understood it, appeared to be geared toward being out of the market for a matter of mere seconds? However, this also seems to involve sitting in real-time doing trades as the market moves in order to maximize captured losses, which is what I’m trying to get away from? Maybe that’s the part I’m adding to it that wasn’t the intent, the real-time part. But the WCI post by Jim that I refer to DID include serial trades using more than two ETF partners within the same 30 day stretch…I think from VXUS to IXUS to VEU, then even splitting to VEA/VWO from there? Something along those lines… I know I didn’t just make this up, but I don’t have a link to the specific post. Bascially, I’m looking to maximize capture of significant losses (not every possible nickel) at times other than pandemic level market drops or year-end account review. The cumulative effect seems like it could add up to thousands…at least until these relatively new tax lots “mature” into a state of lowered cost basis beyond market fluctuations or until the market moves on from this period of wild volatility & correction territory.
Well, if you don’t see 5 trades in 22 days on $70K in investments as excessive, carry on I suppose. I agree the first $4,000 in losses are a lot more useful than the next $400,000. Given that I’m currently carrying forward 7 figures of losses, I don’t have the same motivation to find a few thousand dollars more as you may. I wouldn’t be surprised if as you accumulate losses over the years that you become less demanding of yourself to acquire more.
I agree when you’re TLHing you don’t want to be out of the market very long if at all.