Tax Loss Harvesting Assistant

Harvesting converts a paper loss into a deductible one by selling the position. Under US rules a realized capital loss offsets realized capital gains without limit, and any excess reduces ordinary income by up to 3,000 dollars per year, or 1,500 dollars for married taxpayers filing separately, with the remainder carried forward indefinitely while keeping its short-term or long-term character. Holding period is the pivot: a position held one year or less produces a short-term loss that offsets short-term gains taxed at ordinary rates as high as 37 percent federal, while a long-term loss first meets gains taxed at 0, 15, or 20 percent. Because the deduction is worth your marginal rate, the same 10,000 dollar loss saves 3,700 dollars at the top ordinary bracket but only 1,500 dollars against long-term gains at 15 percent. The critical caveat is that harvesting defers rather than eliminates tax. Selling resets your cost basis to the current market value, so a later sale realizes a correspondingly larger gain; the real economic benefit is the time value of the deferred tax plus any arbitrage between the rate at which you deduct and the rate at which you eventually pay. Section 1091 disallows the deduction entirely if you buy a substantially identical security within 30 days before or after the sale, and the disallowed amount is added to the replacement shares' basis. This model also simplifies: actual Schedule D netting works within the short-term and long-term buckets before they cross, the 3.8 percent net investment income tax above 200,000 dollars of modified AGI for single filers is not applied, and state treatment varies widely.

Federal taxation of investment gains began with the Revenue Act of 1913, enacted after ratification of the Sixteenth Amendment, and a preferential rate tied to holding period arrived with the Revenue Act of 1921. That same 1921 statute created the wash sale rule, now codified at Internal Revenue Code Section 1091, after Congress observed investors dumping depressed holdings in late December and buying them straight back in January purely to book a deduction. The 30-day window on each side of the sale has survived essentially unchanged for more than a century, which is why the whole technique is built around finding a correlated but not identical substitute. The deduction cap has its own history. For decades individuals could apply only 1,000 dollars of net capital loss against ordinary income; the Tax Reform Act of 1976 lifted the ceiling to 2,000 dollars for 1977 and 3,000 dollars from 1978 onward, where it has remained, never indexed to inflation. Rate structure churned around it: the Tax Reform Act of 1986 briefly taxed capital gains as ordinary income at 28 percent, the Taxpayer Relief Act of 1997 cut the top rate to 20 percent, the 2003 Jobs and Growth Tax Relief Reconciliation Act dropped it to 15 percent, and the American Taxpayer Relief Act of 2012 fixed the present 0, 15, and 20 percent tiers, with the Affordable Care Act surtax taking effect in 2013. Harvesting itself was a manual December ritual for advisers until automation arrived, with Wealthfront launching daily algorithmic harvesting in 2012 and direct indexing later extending the tactic to individual holdings inside an index.