How do you implement a tax-loss harvesting strategy?

Tax-loss harvesting is the deliberate sale of investments at a loss to offset taxable gains and reduce current tax liability. Michael Kitces, Kitces Research, has detailed how this technique is most effective for taxable brokerage accounts where capital gains are realized, and where investors expect to remain in taxable status long enough for the tax benefits to matter. The practice relies on tax rules that define when losses are recognized and how they can be used, so implementation must follow specific legal constraints.

Rules and basic steps for implementation
Begin by identifying positions with unrealized losses in a taxable account and calculate whether selling them will generate useful tax benefits compared with holding for future appreciation. The Internal Revenue Service provides guidance about the wash-sale rule that disallows a loss if the taxpayer purchases a substantially identical security within 30 days before or after the sale, so investors must plan replacement investments that maintain market exposure without triggering that rule. Typical implementation steps include selling the loss position, immediately buying a nonidentical but economically similar security such as a different exchange-traded fund or a mutual fund with different holdings, and documenting tax lots so specific lots with different purchase dates are harvested instead of entire positions.

Timing, recordkeeping, and account types
Tax-loss harvesting is most commonly executed toward the end of the calendar year when investors and their advisors review realized gains for the year, but opportunistic harvesting can occur whenever losses appear. Detailed recordkeeping is essential because tax lot identification determines which cost basis is realized and whether a sale will create a short-term or long-term loss. Tax-loss harvesting applies to taxable accounts only and is not useful in tax-deferred retirement accounts where losses generally do not provide current tax benefits. Many custodians and financial advisors automate the process, using software to monitor positions and execute replacement trades while avoiding wash-sale pitfalls.

Benefits, risks, and broader considerations
The immediate consequence of harvesting a loss is the reduction of realized capital gains and potentially the ability to deduct up to the amount allowed by law against ordinary income, with any excess losses carried forward to future years as specified by the Internal Revenue Service. Benefits include improved after-tax return if implemented thoughtfully, particularly for investors in higher tax brackets or with concentrated gains. Risks and costs include transaction fees, bid-ask spreads, potential tracking error between the sold security and its replacement, and the possibility of missing a rebound in the sold security if market timing goes awry. Cultural and territorial nuances matter because tax rules differ by country; U.S. taxpayers follow Internal Revenue Service rules whereas investors in other jurisdictions should consult local tax authorities or advisors to understand comparable rules and constraints. Practitioners recommend coordinating tax-loss harvesting with a broader portfolio and financial plan so that short-term tax benefits do not undermine long-term investment objectives.