---
title: 'Tax Loss Harvesting Explained - How To Add 14% To Your Portfolio'
source: 'https://youtube.com/watch?v=i6GW7ONm168'
video_id: 'i6GW7ONm168'
date: 2026-06-28
duration_sec: 609
---

# Tax Loss Harvesting Explained - How To Add 14% To Your Portfolio

> Source: [Tax Loss Harvesting Explained - How To Add 14% To Your Portfolio](https://youtube.com/watch?v=i6GW7ONm168)

## Summary

Tax loss harvesting is a simple strategy that involves selling investments at a loss to reduce your tax burden. It can offset realized capital gains or reduce taxable income, with a deadline of December 31 each year. The video explains the rules, limits, and the wash sale rule, and provides examples to illustrate the benefits.

### Key Points

- **Definition** [0:20] — Tax loss harvesting refers to selling investments at a loss to lower your tax burden by offsetting realized capital gains or taxable income.
- **Deadline** [0:58] — The deadline to harvest losses for the current tax year is December 31.
- **Annual Limit for Income Offset** [1:40] — If you have no realized gains, you can deduct up to $3,000 of losses from taxable income per year (single or married filing jointly).
- **Wash Sale Rule** [2:02] — The wash sale rule prohibits buying a 'substantially identical' security within 30 days before or after the sale, or the loss is disallowed.
- **Account Type** [3:21] — Tax loss harvesting is only possible in taxable brokerage accounts, not retirement accounts.
- **Long-Term Benefit** [7:27] — A study from First Quadrant estimated that tax loss harvesting adds about 14% to the final portfolio value compared to not harvesting.
- **Tax Deferral** [7:48] — Selling at a loss lowers your cost basis, meaning greater gains to be taxed later, so you are deferring taxes, not avoiding them entirely.

## Transcript

Tax loss harvesting may sound fancy and complicated,
but I promise it’s super simple, and you’ll
have a better understanding of it after watching
this video.
Here we’ll explore what tax loss harvesting
is, why and how you’d want to do it, the
rules, limits, and deadlines involved, examples,
and how to avoid the infamous “wash sale”
in your portfolio.
What Is Tax Loss Harvesting?
Tax loss harvesting just refers to selling
investments at a loss to lower your tax burden.
Simple as that.
Specifically, we’re talking about selling
positions that have unrealized capital losses
at the time of sale in order to offset realized
capital gains (or taxable income, if you don’t
have any realized gains) for that year.
If used to offset realized capital gains,
those gains can be short-term or long-term,
the former of which are taxed at higher rates.
In other words, realized losses can be used
as a credit against any realized gains during
the year.
We call this sale “harvesting” the loss,
hence the name tax loss harvesting.
Tax loss harvesting to offset that year’s
gains or income must be done by the end of
the calendar year, so the deadline is December
31.
Naturally, this encourages many to employ
a strategy of checking the portfolio at the
end of the year to harvest any losses, but
tax loss harvesting can actually be used anytime
your position in a security has an unrealized
loss throughout the year.
Day traders will use this as a tool to offset
short-term capital gains.
If the long term investor is simply holding
and has no realized gains, their harvested
losses can reduce their income tax liability.
So far tax loss harvesting sounds like a great
way to reduce one’s tax liability.
Unfortunately there are some limits and rules
to abide by.
First, if the long term investor mentioned
previously who has no realized gains wants
to harvest losses to reduce their taxable
income, they can only do so up to a limit
of $3,000 per year if single or married filing
jointly.
That is, if your realized net loss on your
investments at the end of the year is $5,000,
you can only deduct up to $3,000 from your
taxable income for that year, but you can
also carry forward the unused loss of $2,000
to harvest in the future.
Secondly, there’s an important tax loss
harvesting rule from the IRS known as the
wash sale rule that prohibits investors from
using losses to offset gains of the same security.
The rule states that the investor wishing
to harvest losses cannot buy a “substantially
identical” security within 30 days on either
side of the sale, as doing so would trigger
a “wash sale” which invalidates the harvesting
of the loss.
This rule applies across all your investment
accounts holistically.
It also applies to reinvested dividends and
capital gains distributions, so if you’re
wanting to harvest losses, you’d want to
turn that off.
After you sell to harvest a loss, you can
then either buy a substitute fund immediately,
or hold cash for 31 days and then buy your
position in the original fund again.
While a bit more complicated, the former may
be the more prudent move, because we know
only a handful of great days for the stock
market account for much of each year’s performance,
and those days could very well occur during
that 31 day period.
But of course, in true IRS fashion, they have
never explicitly defined what constitutes
a “substantially identical” security,
so as you can imagine, there exists reasonable
disagreement on whether or not two funds from
two different providers that track the same
index would be considered “substantially
identical.”
Luckily, we can usually avoid that anyway
by just using different indexes to capture
the same exposure we’re after.
Also remember that tax loss harvesting is
only possible in taxable brokerage accounts,
as the IRS does not tax growth in retirement
accounts in the U.S. Thus, if you don’t
have a taxable account, you don’t need to
worry about tax loss harvesting at all.
Now let’s check out some examples to see
tax loss harvesting in action.
The numbers for gains and losses are made
up.
The tax brackets and harvesting limits are
real but are subject to change.
Consult your tax professional.
I’ve included the cursory math on the screen
for each example.
First let’s look at an example of offsetting
realized capital gains with a harvested loss
to simply reduce the capital gains tax liability.
Suppose Sarah has sold a position during the
year for a realized short-term capital gain
of $2,000 and is in the 24% tax bracket.
Since short-term capital gains are taxed at
her marginal tax rate, she is expecting to
pay $480 in taxes on those gains at tax time.
Before the end of the year, she notices another
position with an unrealized loss of $1,500.
By harvesting that loss, she can now offset
those $2,000 in gains with it, so her short-term
capital gain is reduced to $500, on which
she’ll now only pay $120 in taxes, a reduction
of 75%.
Remember short-term capital gains apply to
positions sold within a year, after which
they’re characterized as long-term capital
gains.
Long-term capital gains are taxed at lower
rates.
Specifically, if Sarah’s previous position
were a long-term capital gain, she would owe
15% in taxes on it instead of 24%.
If she deployed the same tax loss harvesting
strategy, she would have reduced her capital
gains tax liability from $300 to $75, a reduction
of 60%.
This illustrates that tax loss harvesting
is more impactful for short-term gains, but
is still useful for long-term gains as well.
Now let’s look at an example where the net
loss is equal to the net gain.
Assume Ashley has sold a position during the
year for a realized long-term capital gain
of $2,000 and later notices before the end
of the year that she has an unrealized loss
of the same amount, $2,000.
Harvesting the loss offsets the gain in full
so she now has zero capital gains tax liability
for the year.
For the next example, we’ll look at a situation
where the net loss is greater than the net
gain.
Assume Ashley’s unrealized loss from the
previous example is now greater at $3,000
and she still has the realized long-term gain
of $2,000.
She can offset that gain in full and then
use the remaining $1,000 loss to directly
reduce her taxable income.
If her long-term capital gains rate and effective
tax rate are both 15%, she has saved $300
in capital gains taxes and $150 in income
taxes for a total tax savings of $450.
Lastly, we’ll look at an example with a
large loss greater than the income-offset
limit and zero realized gains.
If you subscribe to the Boglehead philosophy
that I preach throughout this site, this is
the most likely situation you’ll find yourself
in out of these examples.
Pretend Patrick is a long-term investor who
simply invests a portion of his paycheck into
his taxable brokerage account of index funds
regularly and has no intention to sell to
realize gains until retirement.
While his account value has obviously grown
over the years, he has specific tax lots (specific
groups of shares bought earlier in the year)
with unrealized losses totaling $5,000 after
markets faltered during the year, and he has
zero realized gains because he has not sold
any of his positions.
Remember we can use tax loss harvesting to
offset income up to $3,000 per year, so Patrick
can book that $5,000 loss, reduce his taxable
income for the year by $3,000, and then carry
forward that extra $2,000 in unused losses
to use next year or sometime in the future.
I’ve seen many ask if tax loss harvesting
is “worth it” when considering the extra
time and effort required, to which I’d reply:
First, it’s a very small amount of time
and effort required to harvest losses each
year.
Secondly, yes a $3,000 tax write-off each
year would obviously be valuable to many.
Lastly, we showed earlier how tax loss harvesting
becomes increasingly impactful as one’s
marginal tax rate increases.
A study from First Quadrant estimated that
tax loss harvesting adds about 14% to the
final portfolio value compared to one that
does not harvest losses annually.
For a $1 million portfolio, that would be
an extra $140,000.
So it sounds like tax loss harvesting is always
gravy all the time, right?
Well, not quite.
Recognize that in selling at a loss and re-entering
the position at the current price, you have
now lowered your cost basis from what it was
previously, which means greater gains to be
taxed later in the future.
Granted, those greater gains won’t be taxed
until you sell, so you’re basically giving
yourself an interest-free loan, and we’d
assume a lower tax bracket in retirement with
little to no income for most people.
But in that sense, it’s important to note
that you have simply deferred taxes; you have
not avoided them entirely.
So an obvious situation when it would not
make sense to tax loss harvest is if you wouldn’t
be taxed on gains in the first place, which
would happen when your income is low enough
to avoid capital gains taxes altogether.
This only applies to long-term capital gains,
which, at the time of this video, you would
avoid if your annual income is below about
$40k.
Now let's look at the steps for how to tax
loss harvest.
1 - Turn off dividend reinvestment.
Make sure you haven’t bought any shares
of the fund you intend to TLH in the past
30 days.
2 - Sell the position at a loss.
3 - Buy an alternative replacement fund (examples
below) or hold cash for 31 days and then re-enter
the original position.
4 - Turn dividend reinvestment back on unless
you plan to TLH more throughout the year.
Here is a non-exhaustive list of groups of
alternative index funds that you can swap
out that we can be sure would not be classified
as “substantially identical.”
I'm not going to go through them one by one
so you can pause the video here or visit the
link in the description to sift through this
list.
In conclusion, tax loss harvesting – selling
losing positions to offset gains and/or reduce
taxable income – may be a useful part of
your investing strategy.
The tax savings from harvesting losses increase
as one’s marginal tax rate increases.
Plan ahead to ensure your tax loss harvesting
tactics go smoothly.
Follow the steps above and decide whether
or not to buy a substitute fund or hold cash
for 31 days.
For those using M1 Finance, note that while
the broker does not specifically automatically
harvest tax losses for you, their tax optimization
selling algorithm does sell tax lots with
losses first anytime you sell shares.
How do you approach tax loss harvesting in
your portfolio?
Let me know in the comments.
Thanks for watching.