Use Tax-Loss Harvesting to Offset a Windfall Gain
Example: Capital gain from windfall (e.g., home sale above exclusion, RSU sale): 75000 $ · Portfolio losses you can harvest this year: 30000 $ · Ordinary income available to offset (up to $3,000/yr after gains): 3000 $ · Long-term capital gains rate: 15 % · Marginal ordinary income tax rate: 24 %
| Tax savings from harvesting | $4,500 |
| Tax without harvesting | $11,250 |
| Tax after harvesting | $6,750 |
| Loss carryforward to future years | $0 |
Worked example
A $75,000 capital gain from selling RSUs; you harvest $30,000 in losses from an underperforming position. Net gain: $45,000. Tax without harvesting: $75,000 × 15% = $11,250. Tax after harvesting: $45,000 × 15% = $6,750. Tax savings: $4,500 — using losses you were already sitting on. If losses exceeded the gain, the first $3,000 of excess could offset ordinary income, and the rest carries forward indefinitely.
Frequently asked questions
What is the wash-sale rule?
If you sell an investment at a loss and buy the same or a 'substantially identical' security within 30 days before or after the sale, the IRS disallows the loss for tax purposes. You can avoid this by waiting 31 days or buying a similar-but-not-identical fund (e.g., swapping a Vanguard S&P 500 fund for a Fidelity S&P 500 fund).
Can I harvest losses in a tax-advantaged account?
No — losses inside a traditional or Roth IRA or 401(k) are not deductible. Tax-loss harvesting only works in taxable brokerage accounts, where realized gains and losses flow to your Schedule D.
How long does a loss carryforward last?
Capital loss carryforwards are indefinite — they carry forward every year until fully used, even across decades. They offset capital gains first, then up to $3,000 of ordinary income per year. When you die, carryforwards are extinguished and cannot be passed to heirs.
Does tax-loss harvesting change my long-term returns?
Harvesting defers taxes (by lowering your basis in the replacement investment), not eliminates them. The new position eventually sells at a higher gain. The benefit is the time value of money — paying tax later rather than now — and the ordinary-income-offset on any $3,000 excess. For long horizons, the deferral benefit compounds meaningfully.