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How tax-loss harvesting works
What it means to harvest a loss, the wash-sale rule that trips people up, and why the substantially-identical judgment is yours to make - not a tool's.
Tax-loss harvesting is selling an investment that has fallen below what you paid for it, realizing the loss on purpose, and using that loss to offset gains elsewhere - or up to $3,000 of ordinary income a year ($1,500 if married filing separately), with the rest carried forward. Done carefully, it lowers your tax bill without changing your overall market exposure. Done carelessly, it trips the wash-sale rule and the loss is disallowed.
Why it matters for a self-directed household
A taxable brokerage account accumulates winners and losers. The losers are not just disappointments - they are a usable asset, because a realized loss is worth the tax rate on the gains or income it offsets times the loss amount (and short-term gains, taxed at higher ordinary rates, are the most valuable to offset). For a household with concentrated positions, large capital gains in some years, and a high marginal rate, the math on a harvested loss in a down market can be material - though only when done carefully.
The catch is that the benefit is a deferral and a rate game, not free money: harvesting lowers your cost basis, so you may pay more later. It pays off when you offset short-term gains (taxed high) now and the eventual gain is long-term (taxed low), or when the deferral itself is valuable.
The wash-sale rule
This is the rule that catches people. If you sell at a loss and buy the same or a substantially identical security within 30 days before or after the sale - a 61-day window centered on the sale date - the IRS disallows the loss. The window also reaches across your accounts, including an IRA, so a "replacement" buy in another account can quietly void the harvest.
A worked example: you sell a fund at a $20,000 loss on December 10 to offset gains. If you (or your spouse, or your IRA) bought the same fund on December 1, or buy it again by January 9, the loss is disallowed. The usual move is to buy a similar but not identical fund to hold the exposure through the window - but whether two funds are "substantially identical" is a judgment with no bright-line IRS test.
How Ironlake treats it
Ironlake's Loss Harvesting Scanner flags candidate lots showing a loss and checks the 30-day backward window across your accounts for wash-sale risk. The "substantially identical" judgment stays yours: you maintain your own Replacement Security Library - your pairs of sold-ticker to replacement-ticker - and the scanner only uses pairs you have added. To get you started, Ironlake offers a set of commonly-cited pairs (different fund family, similar exposure - the kind DIY investors discuss in the Bogleheads literature) that you review and adopt one at a time; it never tells you which security is right for your situation. That choice, and the substantially-identical call, are what keep the line between decision support and investment advice on your side of it.
- Related: the tax character of investment income.
- See the workflow guides in how-to.
Honest limits
Lot-level harvesting needs lot-level data - acquisition date and cost basis per purchase - so it becomes available once you have entered your lots, not in model-only setup. And the wash-sale check Ironlake runs covers the accounts it can see; a buy in an account it does not track is invisible to it. The tool shows the math and flags the risk; the harvest decision, and the substantially-identical call, are yours.