Tax Loss Harvesting Calculator
Calculate potential tax savings from harvesting investment losses against capital gains. Enter values for instant results with step-by-step formulas.
Formula
Tax Savings = (Gains Offset x Gains Rate) + (Ordinary Income Offset x Income Rate)
Harvested losses first offset capital gains dollar-for-dollar, eliminating tax at the capital gains rate. Excess losses offset up to $3,000 of ordinary income at your marginal rate. Remaining losses carry forward to future years indefinitely.
Worked Examples
Example 1: Offsetting Capital Gains
Problem: You have $20,000 in realized capital gains (long-term) and $8,000 in unrealized losses available to harvest. Federal bracket 24%, state 5%, income $100,000.
Solution: Without harvesting: Tax = $20,000 x (15% + 5%) = $4,000\nAfter harvesting $8,000 loss:\nNet gains = $20,000 - $8,000 = $12,000\nTax = $12,000 x (15% + 5%) = $2,400\nTax savings = $4,000 - $2,400 = $1,600\nNo excess losses (gains > losses)
Result: Tax Savings: $1,600 | Tax reduced from $4,000 to $2,400 | No carryforward losses
Example 2: Losses Exceeding Gains with Carryforward
Problem: You have $5,000 in short-term gains and $15,000 in unrealized losses plus $3,000 in loss carryforward. Federal bracket 32%, state 6%.
Solution: Total losses: $15,000 + $3,000 = $18,000\nOffset gains: $18,000 - $5,000 = $13,000 excess\nOrdinary income offset: $3,000 (max)\nNew carryforward: $13,000 - $3,000 = $10,000\nGains tax saved: $5,000 x (32% + 6%) = $1,900\nOrdinary income saved: $3,000 x (32% + 6%) = $1,140\nTotal savings: $1,900 + $1,140 = $3,040
Result: Tax Savings: $3,040 | $10,000 carried forward | Gains fully offset | $3,000 ordinary income deduction
Frequently Asked Questions
What is tax-loss harvesting and how does it reduce my taxes?
Tax-loss harvesting is an investment strategy where you sell securities that have declined in value to realize capital losses, then use those losses to offset capital gains and reduce your tax liability. The IRS allows you to first offset capital gains dollar-for-dollar with capital losses, and if losses exceed gains, you can deduct up to $3,000 of excess losses against ordinary income per year. Any remaining losses carry forward to future tax years indefinitely. For example, if you have $20,000 in capital gains and harvest $8,000 in losses, your taxable gains drop to $12,000, saving approximately $2,320 at a combined 29% tax rate. After selling the losing position, you typically reinvest in a similar but not substantially identical security to maintain your market exposure. This strategy is essentially a timing optimization that defers taxes rather than eliminating them permanently, but the time value of money makes this deferral genuinely valuable.
How much can I deduct from tax-loss harvesting?
There is no limit on the amount of capital losses you can use to offset capital gains in any given year. If you have $50,000 in gains and $50,000 in harvested losses, your taxable gains are reduced to zero. Beyond offsetting gains, excess capital losses can offset up to $3,000 per year of ordinary income, which at a 24% federal bracket saves approximately $720 in federal tax alone. Any losses beyond the capital gains offset plus $3,000 ordinary income deduction carry forward to future years indefinitely. This carryforward is one of the most valuable aspects of tax-loss harvesting because large losses harvested in a down year like 2008 or 2022 can offset gains for many years to come. Short-term losses first offset short-term gains which are taxed at higher ordinary rates, then offset long-term gains. This ordering maximizes the tax benefit since short-term capital gains rates can be nearly double long-term rates.
When is the best time to harvest tax losses?
While tax-loss harvesting is commonly associated with year-end planning, the optimal approach is to monitor your portfolio throughout the year and harvest losses whenever they become available. Market volatility creates harvesting opportunities at unpredictable times, and waiting until December means you may miss opportunities from earlier in the year. After a significant market decline of 10% or more is an excellent time to review your portfolio for harvesting opportunities. Some automated platforms like Betterment and Wealthfront perform daily tax-loss harvesting, identifying opportunities as they arise. However, be strategic about timing within the year: losses harvested in January have a longer time value than those harvested in December of the same tax year. Also consider your overall tax situation: if you anticipate unusually high income this year from a bonus or asset sale, harvesting losses becomes more valuable because they offset income taxed at your highest marginal rate. Avoid harvesting losses on positions you expect to rebound quickly if you cannot find an acceptable substitute investment.
Does tax-loss harvesting actually save money or just defer taxes?
Tax-loss harvesting primarily defers taxes rather than eliminating them, because when you repurchase a similar investment at the lower cost basis, your future gains will be larger. However, this deferral creates genuine economic value through the time value of money: a dollar saved today is worth more than a dollar paid in the future. If you harvest a $10,000 loss saving $2,900 in taxes today and invest that savings, it compounds over time. At 7% annual return over 20 years, that $2,900 grows to approximately $11,221, while the deferred tax of $2,900 remains constant in nominal terms. Additionally, tax-loss harvesting can permanently save money if you donate the appreciated replacement shares to charity, die holding the shares which receive a stepped-up basis, or use the losses to offset higher-taxed short-term gains while eventually paying long-term rates on the replacement. Research from Vanguard estimates that systematic tax-loss harvesting adds approximately 0.50% to 1.50% in after-tax return annually for taxable portfolios.
What securities are best for tax-loss harvesting?
The best candidates for tax-loss harvesting are positions with significant unrealized losses that have readily available substitute investments to maintain your desired asset allocation. Broad market index funds and ETFs are ideal because there are many similar but not substantially identical alternatives. For example, you can swap between the Vanguard Total Stock Market ETF and the iShares Core S&P Total US Stock Market ETF, or between S&P 500 funds from different providers. International funds, bond funds, and sector-specific ETFs also have numerous alternatives available. Individual stocks are trickier because there may not be a substantially similar substitute, and staying out of the position for 31 days creates concentration risk. Avoid harvesting losses on positions where you have very strong conviction about near-term recovery, as the wash sale rule prevents immediate repurchase. Tax-managed mutual funds automatically perform internal harvesting, which can reduce but not eliminate the benefit of additional portfolio-level harvesting.
How does tax-loss harvesting interact with the $3,000 ordinary income deduction?
When your capital losses exceed your capital gains, the IRS allows you to deduct up to $3,000 of the excess against ordinary income each year, with unused losses carrying forward indefinitely. This $3,000 deduction is particularly valuable because it offsets ordinary income taxed at your marginal rate, which is typically higher than capital gains rates. At a 32% federal bracket plus 5% state tax, the $3,000 deduction saves $1,110 annually. If you accumulate $30,000 in excess losses, you can deduct $3,000 per year for 10 years, generating $11,100 in cumulative tax savings. This ongoing deduction provides steady value even in years when you have no capital gains to offset. For married couples filing separately, the limit is $1,500 per spouse. Strategic planning around this threshold is important: if you already have $3,000 in excess losses for the year, additional harvesting provides value only if you expect future capital gains to offset. Some advisors recommend maintaining a reserve of carryforward losses to offset unexpected gains from mutual fund distributions or forced realizations.