Tax loss harvesting, and the trap in it
The loss is only worth harvesting if you would not have sold anyway. Do not let the tax tail wag the investment dog.
Use a loss you already have, without accidentally wrecking the portfolio to get it.
How Tax loss harvesting works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
What a 2% fee costs over thirty years
Both lines earn the same 8%. One pays 0.07% a year, the other pays 2%. The gap is not a rounding error, it is most of the point of the exercise.
- 1
The mechanic is simple
Sell something that is down, realise the loss, and set it against gains you have realised elsewhere. Your tax bill falls. The loss was already real; you are simply making it useful.
- 2
You cannot just buy it straight back
Rules exist precisely to stop this. Repurchase the same holding within a defined window and the loss is disallowed. The rules differ by jurisdiction and the details matter, so check them rather than assume.
The workaround people reach for, buying a very similar fund instead, is legal in some places and not others. This is the point at which an accountant costs less than the mistake.
- 3
The real trap is investing badly for tax reasons
If you sell a business you wanted to own, in order to save tax, and it runs while you are out of it, the tax saving will be dwarfed by the return you missed. The tax benefit is real and it is small. The opportunity cost can be enormous.
- 4
Best done as part of rebalancing
You were going to trim and top up anyway. Doing it in a tax-aware order costs nothing extra and captures the benefit without distorting a single investment decision.
You can name a loss worth harvesting and say why you were happy to sell it anyway.
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