Tax-loss harvesting
Loss harvestingTax-loss harvesting is selling a lot that stands below its cost basis so that the loss becomes realized and can be netted against realized gains in the same tax year. A loss is only a tax figure once the lot is sold; while the lot is held, the loss is unrealized and offsets nothing.
What is tax-loss harvesting?
A lot is a set of shares bought on one date at one price. When it is sold, the difference between the proceeds and its cost basis is a realized gain or a realized loss. The IRS nets the year's realized losses against its realized gains, so a realized loss reduces the gain the year is taxed on. A loss that is never realized never enters that sum.
The wash-sale rule limits it. Under the IRS rule, if the same or a substantially identical security is bought within 30 days before or after the sale, the loss is disallowed for that year and is added to the basis of the replacement shares instead, so it is recognized when those shares are sold.
Whether a realized loss counts as short-term or long-term follows the lot's holding period, and the IRS nets like against like first: short-term losses against short-term gains, long-term against long-term, and the remainders against each other. A net loss left after all gains can offset a limited amount of other income, with the rest carried into later years.
How tax-loss harvesting works, with numbers
In March, 40 shares of one fund bought at $70 are sold at $115. The proceeds are $4,600 against a $2,800 basis, so the year holds a realized gain of $1,800.
Another holding has a lot of 100 shares bought at $60 that now trades at $48. Held, it is an unrealized loss of $1,200 and changes nothing about the $1,800. Were the lot sold at $48, the $1,200 loss would be realized, and the year's net realized gain would be $600.
- Sale of the first lot, 40 sh × $115
- $4,600
- Basis of the first lot, 40 sh × $70
- − $2,800
- Realized gain
- $1,800
- Second lot at $48, less its basis at $60, 100 sh
- − $1,200
- Net realized gain, were the second lot sold
- $600
Why tax-loss harvesting matters
The realized gain is what the year is taxed on, and a realized loss is the only kind that reduces it. In the example the $1,200 loss exists either way; only a sale moves it from the holding's value into the year's tax sum.
The sale also resets the lot. Shares bought back after the wash-sale window start a new lot at the new price, with a new basis and a new holding period. The realized loss stays in the year's sum and no longer shows on the holding.
Tax-loss harvesting in Taiga Finance
Taiga Finance makes no trades and recommends no sale, so it has no tax-loss harvesting feature. What it shows is what a harvest is picked from: the holding's drawer in Investments lists each lot with its “Gain $”, signed, so a lot standing below its basis reads as a negative figure, and its “Term”, “LT” once held more than a year and “ST” before that. The table sorts by any column. The figures are unrealized; the ledger records no sales and prints no realized gain or loss.
Accounts & balances →Key takeaways: Tax-loss harvesting
- Tax-loss harvesting is selling a lot below its cost basis so the loss is realized and nets against the year's realized gains.
- An unrealized loss offsets nothing. In the example, a $1,200 loss on a held lot leaves a $1,800 realized gain untouched; sold, it would bring the net to $600.
- The IRS wash-sale rule disallows the loss when the same or a substantially identical security is bought within 30 days either side of the sale, and adds it to the new shares' basis.
- Taiga Finance shows each lot's signed “Gain $” and its “LT” or “ST” term in the holding's drawer, and recommends no sale.
Questions about Tax-loss harvesting
What is tax-loss harvesting?
Selling a lot that is worth less than its cost basis so the loss is realized, which lets it net against realized gains in the same tax year. A held lot's loss is unrealized and does not enter the year's sum.
How does the wash-sale rule affect tax-loss harvesting?
Under the IRS rule, buying the same or a substantially identical security within 30 days before or after the sale disallows the loss for that year. The disallowed amount is added to the cost basis of the replacement shares and is recognized when those shares are sold.
Does Taiga Finance do tax-loss harvesting?
No. It makes no trades and recommends no sale. The holding's drawer lists each lot's signed gain or loss and whether it is long-term or short-term, which is what a harvest is picked from; the sale itself happens at the brokerage.