Tax-Loss Harvesting

When a family sells an investment for more than they paid, they typically owe tax on that gain. Tax-loss harvesting reduces that bill by intentionally selling other positions that are currently worth less than their purchase price, generating a realized loss. That loss can offset realized gains, potentially reducing the amount of income subject to tax in a given year. The investment itself is not necessarily abandoned. The goal is the tax benefit, and the family may want to maintain roughly similar market exposure.

The important vocabulary caveat here is the wash-sale rule. In the United States, a wash sale occurs when an investor sells a security at a loss and then buys the same or a "substantially identical" security within a window of time before or after the sale. When a wash sale is triggered, the tax loss is disallowed, it cannot be used to offset gains. Families engaged in harvesting must track their transactions carefully across all accounts to avoid inadvertently triggering this rule.

Tax-loss harvesting is most relevant in taxable accounts; it does not apply to tax-deferred or tax-exempt structures in the same way. It interacts directly with cost basis records, because knowing what was paid for each lot of securities is essential to identifying which positions carry losses. For families with complex portfolios spanning public equities and other asset classes, this is typically part of a broader tax coordination effort. Qualified CPAs and tax counsel must be involved, as the rules are detailed and jurisdiction-specific.