How Tax-Loss Harvesting Works

Turn losses into tax savings without changing your portfolio

1

You own VOO (S&P 500 ETF) and it's down $5,000 from your purchase price

2

Sell VOO to 'realize' the $5,000 loss

3

Immediately buy a similar (but not identical) fund like IVV or SPLG

4

Your portfolio is essentially the same, but you now have a $5,000 tax deduction

5

That $5,000 loss offsets gains elsewhere, saving you $1,000-1,850 in taxes

$5,000 harvested loss=x 37% tax rate= $1,850 saved

Annual benefit

0.5-1.5%

of portfolio value

Max vs income

$3,000/yr

excess losses carry forward

Unused losses

Carry forever

until used up

free money

Tax-loss harvesting is the closest thing to a free lunch in investing. You keep the same market exposure but reduce your tax bill. Every robo-advisor does this automatically.

Check yourself

After selling VOO at a loss, what should you buy to stay invested in the S&P 500?

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