Tax Selling

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Tax Selling (Tax-Loss Harvesting): What It Is and How It Works

Tax selling, often called tax-loss harvesting, is the practice of selling investments that have unrealized losses to realize a capital loss for tax purposes. Realized capital losses can offset realized capital gains, reducing an investor’s tax bill.

How it works

  • Realized capital losses offset realized capital gains dollar for dollar.
  • Example: If you have a $15,000 capital gain and you realize a $7,000 loss, your net taxable gain is $8,000. If that gain is taxed at 20%, your tax would be $1,600 instead of $3,000.
  • If losses exceed gains, many tax systems allow a limited amount of loss to offset ordinary income and permit carrying forward remaining losses to future years (check your jurisdiction and IRS rules for limits and carryforward rules).

The wash-sale rule

  • The IRS prohibits “wash sales.” A wash sale occurs when you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale.
  • If a transaction is classified as a wash sale, the loss is disallowed for current tax reporting and instead is added to the basis of the repurchased shares.
  • The wash-sale rule applies across brokers and accounts, so buying the same security through a different broker within the 30-day window still triggers the rule.

Market timing and effects

  • Tax selling commonly spikes near year-end (November–December) as investors realize losses before filing taxes.
  • Concentrated selling can temporarily depress prices, potentially creating short-term buying opportunities for investors who want exposure to those securities after the tax window closes.

Practical strategies and considerations

  • If you want to maintain market exposure without triggering a wash sale:
  • Buy a different security that is not “substantially identical” (e.g., a similar ETF in the same sector) as a temporary replacement.
  • Wait at least 31 days to repurchase the exact same security.
  • Keep clear records of sales and repurchases to support tax reporting.
  • Consider the tax implications alongside portfolio goals — realize losses for tax benefit only when consistent with your investment strategy.
  • Be aware of transaction costs, bid-ask spreads, and potential changes in market conditions during any waiting period.

Key takeaways

  • Tax selling lets investors use realized losses to reduce capital gains and lower taxes.
  • Avoid wash sales: do not repurchase the same or substantially identical security within 30 days before or after the sale.
  • Year-end tax selling can temporarily depress prices; some investors use this to buy attractive securities and then revisit positions after the wash-sale period.
  • Use tax-loss harvesting thoughtfully as part of an overall investment plan and keep accurate records for tax reporting.

Bottom line: Tax selling is a legal strategy to realize losses to offset gains and manage tax liability, but it must be executed carefully to avoid wash-sale rules and unintended portfolio risks.