Tax Loss Harvesting Calculator

What Is Tax Loss Harvesting?

Tax loss harvesting is the practice of selling an investment that has fallen below your purchase price to deliberately realize a capital loss, then immediately reinvesting the proceeds in a similar security to maintain market exposure. The realized loss reduces your taxable capital gains — or, if your losses exceed your gains, offsets up to $3,000 of ordinary income per year, with any excess carried forward to future years.

The strategy is not about eliminating taxes — it’s about deferring them. When you eventually sell the replacement security, you’ll owe taxes on a larger gain because your cost basis is lower. The financial benefit comes from the time value of money: the tax savings you keep now compound in the market, while the future tax obligation stays fixed in nominal dollars.

How Tax Loss Harvesting Works

The mechanics involve four steps executed in a specific order.

Step 1: Identify a harvestable loss

Harvestable Loss = Cost Basis − Current Market Value

You must have an unrealized loss — the investment must be worth less than what you paid.

Step 2: Sell the losing position

The sale realizes the loss for tax purposes. The loss is classified as short-term (held less than one year, taxed at ordinary income rates) or long-term (held one year or more, taxed at LTCG rates).

Step 3: Immediately buy a similar replacement

To avoid missing a market recovery, reinvest immediately in a correlated but not identical security. The IRS wash sale rule prohibits repurchasing the same or “substantially identical” security within 30 days before or after the sale.

Step 4: Calculate the net benefit

Immediate Tax Savings = Harvestable Loss × Current Tax Rate

Future Tax Cost = Harvestable Loss × Future Tax Rate (when replacement is sold)

Net Benefit = (Immediate Savings × (1 + Return)^Years) − Future Tax Cost

The net benefit is positive whenever your immediate savings — compounded in the market — exceed the future tax cost. With positive expected returns and a holding period of several years, this is almost always true.

A Worked Example

Morgan holds $18,000 worth of an international equity ETF that cost $25,000 two years ago. The $7,000 unrealized loss is long-term (held > 1 year). Morgan is in the 22% ordinary income bracket and 15% LTCG bracket. She plans to hold the replacement for 20 years at 7% annual returns.

• Harvestable loss: $25,000 − $18,000 = $7,000
• Immediate savings (at current LTCG rate of 15%): $7,000 × 0.15 = $1,050

Wait — this is a long-term loss, so it offsets long-term gains first at 15%. But if Morgan has no long-term gains, the loss offsets up to $3,000 of ordinary income at 22%:

• Ordinary income offset: $3,000 × 0.22 = $660
• Remaining carryforward: $4,000 for future years

For simplicity, if Morgan has $7,000 of long-term gains to offset, savings are $1,050.

• Savings compounded 20 years: $1,050 × (1.07)^20 = $4,060
• Future tax cost (paying 15% on $7,000 more gain): $1,050
• Net benefit: $4,060 − $1,050 = $3,010

Morgan keeps $3,010 more by harvesting the loss now rather than holding — purely from the time value of the deferred tax. If the loss were short-term (taxed at 22% now, converting to 15% long-term later), the benefit would be even larger.

The Complete Tax Loss Harvesting Guide

The Wash Sale Rule in Practice

The wash sale rule is the primary trap in tax loss harvesting. IRS Section 1091 disallows a capital loss if you purchase the same or “substantially identical” security within the 30-day window before or after the sale (a 61-day total window centered on the sale date).

What triggers wash sales:

• Selling SPY and buying SPY (identical)
• Selling a Vanguard S&P 500 fund and buying a Fidelity S&P 500 fund that tracks the same index (likely substantially identical — courts have not definitively ruled, but the IRS position is unfavorable)
• Selling stock and buying call options on the same stock
• Selling in a taxable account and buying in your IRA within the window (per IRS Rev. Rul. 2008-5)

Safe replacement pairs:

• VTI (Vanguard Total Market) ↔ ITOT (iShares Total Market) — different indexes (CRSP vs. Russell 3000), generally considered safe
• VXUS ↔ IXUS — international developed + emerging
• VOO (S&P 500) ↔ IVV or SCHB — different providers tracking the same index is a gray area; many advisors consider it safe, but consult a tax professional for large amounts
• Individual stock losses can be replaced with an ETF in the same sector

Short-Term vs. Long-Term Loss Harvesting

The tax rate on a harvested loss depends on how long you held the investment:

Short-term losses (held < 1 year) are taxed at ordinary income rates when offsetting short-term gains — often 22%, 24%, or higher. If you have no short-term gains, short-term losses offset long-term gains, then ordinary income (up to $3,000/year).

Long-term losses (held ≥ 1 year) offset long-term gains at LTCG rates, then short-term gains, then ordinary income.

The most tax-efficient harvest: a short-term loss offsetting ordinary income (savings at 22–37%) that you convert to a long-term gain on the replacement (paid back at 15–20%). This rate arbitrage amplifies the net benefit significantly beyond just the time value calculation.

The $3,000 Ordinary Income Deduction and Loss Carryforward

If your total capital losses exceed your total capital gains in a year, you can deduct up to $3,000 of the net loss against ordinary income. Any remaining loss carries forward to the next tax year — indefinitely, until used up.

A $30,000 harvested loss with no offsetting gains generates:

• Year 1: $3,000 deduction against ordinary income
• Year 2: $3,000 more (from carryforward)
• …and so on for 10 years, assuming no gains to absorb the losses faster

Large harvests are best paired with large realized gains — otherwise the $3,000 annual cap slows down your benefit realization.

When Tax Loss Harvesting Is Most Valuable

High ordinary income tax rates. At 37%, a $10,000 short-term loss saves $3,700 immediately. At 10%, it saves $1,000. The absolute benefit scales directly with your marginal rate.

Long holding periods for the replacement. The longer you hold the replacement before selling, the more the immediate savings compound in the market relative to the fixed future tax cost.

Rate conversion opportunities. Converting a short-term loss (taxed at ordinary rates) into a future long-term gain (taxed at LTCG rates) is particularly valuable. The effective tax rate arbitrage is a permanent reduction in tax owed, not just deferral.

Volatile market environments. Significant drawdowns — 2008, 2020, 2022 — create large harvesting opportunities. Systematic monthly or quarterly portfolio reviews are more effective than waiting for “obvious” losses.

Automated Tax Loss Harvesting

Robo-advisors (Betterment, Wealthfront, Schwab Intelligent Portfolios) offer automated daily tax loss harvesting. They scan holdings for harvestable losses, execute the trade, and immediately substitute a similar ETF — all while monitoring for wash sale violations across the account.

For portfolios above $100,000 with complex tax situations, the benefit of automation typically justifies the 0.25% annual advisory fee. For smaller, simpler portfolios, manual harvesting 2–4 times per year during market drawdowns is sufficient.

Key Assumptions and Limitations

Assumes losses are fully deductible in the current year. If you have no capital gains and the loss exceeds $3,000, only $3,000 is immediately deductible — the remainder carries forward. The calculator assumes the full loss is offset immediately; adjust the tax savings figure if you expect a multi-year carryforward.

Tax rates are assumed constant. Future marginal rates depend on income, tax law changes, and retirement account distributions. A rate reduction in retirement increases the net benefit; a rate increase reduces it.

Transaction costs are excluded. With commission-free brokers this is minimal, but bid-ask spreads on less liquid securities add a small friction cost.

State taxes are not modeled. Most states conform to federal capital gains treatment and add 3–13% to the effective rate on gains. If your state taxes capital gains as ordinary income, the benefit of harvesting is larger than this calculator shows.