Tax-Loss Harvesting (TLH)
Selling losing positions to realize losses that offset capital gains — and up to $3,000 of ordinary income.
Realized capital losses first offset realized capital gains dollar-for-dollar; up to $3,000 of any excess offsets ordinary income each year, and the rest carries forward indefinitely. Done well, it defers tax and lets you rebalance for free. Done carelessly, it triggers a wash sale that disallows the very loss you were harvesting — which is why it has to be scanned across every custodian at once.
How the offset stacks
Realized capital losses first offset realized capital gains of the same character (long-term against long-term, short-term against short-term), then across character. If losses still remain, up to $3,000 offsets ordinary income each year, and anything beyond that carries forward indefinitely. Done well, harvesting defers tax, lets you rebalance without a tax bill, and builds a carryforward you can deploy in a high-gain year.
The catch that undoes it
The moment you sell a loss and rebuy the same position too soon, the wash-sale rule disallows the loss you were trying to bank. Because that rule spans every account you own — including a spouse's IRA — harvesting is only as safe as your visibility across custodians. A single-account tool that books a loss at one broker can't see the buy that disallows it at another.
How Formation handles it
Formation scans the unified transaction feed across every connected custodian by ticker and labels each opportunity clear, at-risk (a same-family equivalent was bought in the window), or blocked (the same security was repurchased — the loss is disallowed). Blocked losses are excluded from the projected savings, and where a vetted not-substantially-identical replacement exists it's suggested; where one doesn't, the card says “consult your CPA” rather than ship a sketchy pair.
A worked example
You're sitting on $40,000 of realized gains this year and an ETF that's down $25,000. Harvesting the loss cuts your taxable gains to $15,000; if you instead had $50,000 of losses, $40,000 wipes out the gains, $3,000 offsets ordinary income, and $7,000 carries forward. The only way that math holds is if no account rebuys the ETF within 30 days.
Frequently asked
How much can tax-loss harvesting save?
It defers tax rather than erasing it — the benefit is the time value of the deferred tax plus up to $3,000/year against ordinary income. The actual dollar value depends on your marginal rate and whether you have gains to offset, which is why honest tools label it estimated.
Does harvesting work in a retirement account?
No. Gains and losses inside IRAs and 401(k)s aren't realized for tax, so there's nothing to harvest there — but a purchase in those accounts can still disallow a loss you take in a taxable account.
In Formation
TLH engine with wash-sale awareness
Related terms
See this in your own numbers.
Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.
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