Tax-Loss Harvesting for Regular Investors

Tax-loss harvesting is one of the few legal ways to turn market downturns into a small consolation prize. The idea is to sell investments that are currently down to lock in a capital loss, then immediately reinvest the proceeds into a similar but not substantially identical fund.

The loss can offset capital gains elsewhere in your portfolio dollar for dollar, and up to three thousand dollars per year can offset ordinary income, with the rest carrying forward indefinitely. Done consistently, this can add a fraction of a percent to your annual after-tax return, which compounds into real money over decades.

Be careful of the wash-sale rule, which disallows the loss if you buy the same or substantially identical security within thirty days before or after the sale. Many robo-advisors automate the process inside taxable accounts. Never let tax tail wag the investment dog; harvesting is a small bonus on top of a good long-term plan, not a reason to trade frequently or hold bad investments.