Tax Loss Harvesting Calculator

Tax-loss harvesting exploits the netting rules of Internal Revenue Code sections 1211 and 1212, which govern how realized capital losses interact with realized capital gains. Losses are first netted within character buckets - short-term against short-term, long-term against long-term - and only then across buckets, which is why this calculator asks whether the gain being offset is long-term or short-term. Long-term gains face preferential rates of 0, 15, or 20 percent depending on taxable income, with the 15 percent band running from roughly 47,025 dollars to 518,900 dollars for a single filer at recent thresholds, while short-term gains are taxed at ordinary marginal rates that can reach 37 percent federally. Because the tax saved equals the loss multiplied by the rate on the income it displaces, a dollar of loss is worth far more against short-term gains than against a zero-percent long-term gain. Two statutory limits shape the result. Excess losses beyond total gains offset only 3,000 dollars of ordinary income per year (1,500 dollars if married filing separately), with the remainder carried forward indefinitely but never carried back for individuals. The 3.8 percent Net Investment Income Tax applies once modified adjusted gross income exceeds 200,000 dollars single or 250,000 dollars joint, so reducing net gains can also reduce NIIT exposure. The main caveat is the wash sale rule of section 1091: buying a substantially identical security within 30 days before or after the sale disallows the loss and rolls it into the replacement basis. Harvesting also lowers cost basis, so it defers rather than erases tax.

The distinction between capital gains and ordinary income entered US law with the Revenue Act of 1921, which first taxed long-held asset gains at a preferential 12.5 percent rate. Limits on deducting capital losses followed quickly, driven by Treasury concern that investors would realize losses selectively while deferring gains - the asymmetry that makes harvesting valuable in the first place. The wash sale rule was enacted in the Revenue Act of 1921 as well and codified in its modern form as section 1091, closing the loop where a taxpayer could sell at a loss and repurchase the same shares moments later. The 3,000 dollar ordinary income offset limit dates to the Tax Reform Act of 1976, which raised the earlier 1,000 dollar cap in stages. Systematic harvesting as a portfolio practice grew out of academic work in the 1970s and 1980s. Work by George Constantinides, including a 1983 Econometrica paper on capital market equilibrium under personal taxes and a 1984 study of the tax-timing option, examined the option-like value of realizing losses early and deferring gains, establishing the theoretical case for continuous rather than year-end harvesting. Practical adoption accelerated with cheap index funds and separately managed accounts in the 1990s, then with automated advisers such as Betterment and Wealthfront after 2008, which scan holdings daily. The Emergency Economic Stabilization Act of 2008 required brokers to report adjusted cost basis to the IRS starting with 2011 equity purchases, making wash sale tracking far more visible and enforcement far more practical.